Last night US stocks went up.
This morning Australian stocks are going up.
Is this the point where the bulls start beating up on the bears?
Or, as one trading guru told your editor yesterday afternoon, ‘Kris, this could be your last chance to sell.’
We agreed with him…which is why we replied, ‘That’s right, we’re buying.’
Confused? Don’t be. We’ll explain all below…
As we wrote on Monday, we find ourselves in the unusual position of having a bullish view on the market.
It’s unusual because we reckon you could count on two hands the number of months we’ve been bullish over the past four years.
But as a fundamental analyst in the small-cap market, we’re always looking for opportunities. And most of the time that means buying opportunities.
It’s not the trendy thing to say you’re buying when Europe is heading off a cliff and the Aussie economy is getting battered by a slowing Chinese economy, but looking at the market there are a lot (and we mean a lot) of stocks that have taken an absolute beating.
And in our view, that makes them worth buying.
We could show you 300-400 charts of Aussie stocks (probably more) that show the same pattern over the past five years: booming in 2007…crashing in 2008…recovering in 2009…and then crashing again in 2011 and 2012.
But rather than 400 charts, just one pretty much sums everything up. It’s the S&P/ASX 300 Metal & Mining Index (XMM):
That chart looks pretty bad. And it is pretty bad. But for many small-cap mining stocks it’s worse. While the index is still above the 2008/2009 low, hundreds of small-cap stocks have crashed below this level.
And it’s not just small-caps. The ‘Five Stocks to Buy’ we wrote to you about last week are all lower today than they were at the beginning of 2009 – when the global economy was on the verge of collapsing (Myer didn’t list until 2010, but is 60% below its listing price).
Yet if you look at a chart of the blue chip S&P/ASX 200 Index, it’s still about 25% higher than the low reached in 2009. So why is that?
Flight to Australian Stock Safety
Slipstream Trader, Murray Dawes says the Aussie market has had a ‘silent crash’, and that it could still fall further.
That may sound odd seeing how bad things look, but what he means is that the main blue-chip index doesn’t reflect what’s happening to the rest of the market.
Because the Aussie market is concentrated into just a handful of big stocks – BHP, Rio and the big four banks – the performance of this small number of stocks hides what’s really happening.
You could even say that the Aussie banks especially have benefited from a perceived flight to safety, as the following chart shows:
Click here to enlarge
While each of our new ‘Five Stocks to Buy’ have fallen below the 2009 low, Aussie banking stocks (represented by Commonwealth Bank on the chart) haven’t crashed. CBA is still up 90% since 2009.
So perhaps you can see why we’re buying certain stocks while at the same time backing Murray’s view that the market (the index and high-priced stocks) is on a knife-edge.
Australian Stock Market on the Edge
The kind of stocks we look at have already fallen a bunch. And they could still fall further, but that’s part of the risk of punting on small-cap shares. You want to buy small-cap stocks while they’re cheap, when no-one else is interested. Because when they do recover, the early gains are often the best gains.
But just because we see value in some stocks, doesn’t mean we see value in all stocks. And if Murray is right, the market is on the verge of taking another hit, and this time even the ‘safe’ stocks may not be so lucky:
‘The market is currently having a tug of war at the last line of support before keeling over into a multi-hundred point fall. I don’t know how long this tussle will last, but it has lasted for about a month now. Last year when we were faced with a similar technical set-up the market took six weeks of to-and-fro before finally succumbing to selling pressure. It then fell 15% in a week.
‘We may see some buying support next week due to the end of tax loss selling pressure, but the outcome of the European summit will be the catalyst for the future direction. The market expects disappointment, so if there is a big announcement a bounce may be imminent. They are all squabbling like little kids at the moment so I’m not holding my breath for a good announcement. A poor outcome could see the selling pressure return. If the current support can’t hold then there is very little support beneath here. A quick fall to 3850 would ensue and from there it could look very scary indeed if that doesn’t hold.’
If you’re an active investor in blue-chip stocks, it always pays to listen to stock traders. Why? Because traders like Murray don’t care which way the market goes.
He’ll balance the probabilities of it going up against it falling and tell his traders to place the appropriate bets.
At the moment, Murray’s charts tell him the balance of probabilities is for the market to fall further, so that’s where he’s telling his traders to place their bets.
But in this market anything can happen, and it can happen quickly. It all depends on how the market behaves around a key level. As he says, ‘If the current support can’t hold then there is very little support beneath here.’
To find out that key support level and how you can set your portfolio to profit (or protect it) from a huge momentum shift, click here…
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Written by Kris Sayce
Kris Sayce is Editor in Chief of Australia’s biggest circulation daily financial email — Money Morning. (You can subscribe to Money Morning for free here).
Kris is also editor of Australian Small-Cap Investigator, his small-cap stock research service, where he provides detailed analysis on some the brightest, smallest listed companies on the ASX.
If you’re already a subscriber to these publications, or want to follow his financial world view more closely, then we recommend you join Kris on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.