Seeing the Opportunities in the Volatility

Are  you like most investors?

I hope not. That’s because it seems to me most people get lost in the day to day movements of the market.

That’s especially so during times of market panic.

It’s at times like now you need to look back at history to take a broader view of the market, and put current events into context.

So that’s what I’m going to do in today’s Money Morning

History repeats in 2016

If we go back roughly 18 years to 1997 and 1998, we find then, as now, markets in turmoil. The All Ordinaries index was breaking significant lows then, the same as it has since the start of the new year.

The parallel goes even further. Back then, markets panicked over an Asian slowdown.

Sound familiar?

The same thing was happening to the Aussie dollar too — it was going down. And oil prices were falling to the floor.

It is all very uncanny when you think about it.

Let’s bring up a chart of the All Ordinaries with the benefit of hindsight…

All Ordinaries (XAO) Monthly Chart

Source:StexClick to enlarge

1997–1998 were turbulent years. Investors saw wild stock market swings. But markets did not collapse then, and they are unlikely to collapse now.

Of course, I don’t blame you if you’re a bit nervous.

The Royal Bank of Scotland has advised clients to sell everything and brace for a cataclysmic year.

Just as a side note, this bank was almost wiped out of existence in 2008, so let’s just say their forecasting ability is open to question.

Anyway, I actually think this news is a good thing. Here’s something I’ve learnt over the years. When everyone is expecting a crash, especially when it dominates the mainstream news, I actually take that as further evidence that we won’t get one.

A market crash only occurs when investors are focused on other things, so they don’t see it coming. Everyone is usually ‘all in’ and fully invested.

There’s no money left on the sidelines to come into the market, so prices have nowhere else to go but down.

Despite market concerns over a China slowdown, the world’s largest economy continues to gather speed. The US added nearly 300,000 new jobs in December, in better than expected figures.

And 2015 saw the US post the second best year of job gains since 1999, with the economy adding 2.65 million jobs.

It’s not all bad news

The falling Aussie dollar is good news for some. For example, it’s a great boon to the tourism sector. A sector I have covered in previous postings. Many stocks connected to this sector are holding their share price or making new highs. There’s a possible trend for you to trade.

The falling currency has also seen the margins of Aussie gold miners improve considerably. That’s another tradeable trend.

As for oil, the falling price will see significant revenue shortfalls for producing countries, but for business and consumers it’s a great boost to spending power and another factor to drive economic growth.

It’s a particularly great boon to airline stocks. There’s another trend to trade.

A stock market correction was expected

From the GFC lows, markets saw their usual four or so years up. Markets do not go up in a straight line. They retrace. They wobble. People worry.

2015 saw an expected stock market correction. In such a market, you have to be a bit more of a stock picker. You can’t rely on just buying the general market.

But put the doom and gloom aside. Start to see the opportunities. They are there.

As we have shown Cycles, Trends and Forecasts subscribers, market panics are often good times to pick up quality stocks at a discount. Not just any stock, but stocks already in a roaring uptrend. A market panic will often see such a stock make a significant higher low.

But of course very few will pick up good stocks while they’re cheap, because it is psychologically very hard to do when bombarded by all the bad news.

Your takeaway

If history is any guide, we can expect more market volatility in 2016. Many investors will be frozen with fear and fail to see the opportunities.

It’s not a time to be loaded up with stocks, but profitable trades are there if you know where to look. You just have to be a bit of a stock picker.

If you’d like more insights on which trends to watch, go here.


Terence Duffy,

Lead Researcher, Cycles, Trends & Forecasts

From the Port Phillip Publishing Library

Special Report: You probably already sense that stocks might be in for another bumpy ride in 2016. But that doesn’t have to mean that you have to miss out on making great money. Because, according to small-cap analyst Sam Volkering, certain stocks could rise hundreds of percent no matter what happens in the next 12 months. In this special report, Sam reveals the simple principle behind that success. And you’ll also discover his top three small-cap picks for 2016, which could bring you gains as high as 338% over the next 12 months. (more)

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Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come.

Money Morning Australia