This Stock Will Warn of the Next Credit Crisis

The Aussie market looks like having a breather today. The Dow and S&P 500 fell 0.25% and 0.3% respectively overnight, while oil prices fell almost 4%. Gold was up nearly US$10 an ounce, to $1,183, while US Treasuries gained.

In other words, it was ‘risk-off’ trading session as investors looked to lock in profits after a few months of very good gains.

Is this the start of a deeper correction?

It could be. But if it is, it shouldn’t surprise you. Check out the chart below, which shows the ASX 200 index. Since the ‘Trump Reversal’ in early November, the Aussie market has screamed nearly 800 points higher.


Source: bigcharts.com
Click to enlarge

After such a strong rally, it would be out of the ordinary for a correction not to unfold. It’s simply how markets work. The question is, does it start now or will it keep pushing higher?

I have no idea. As a guess, it wouldn’t surprise me to see the market continue higher until it gets close to 6,000 points. That was the 2015 market peak, and represents a major area of chart resistance.

From a technical or charting perspective, it makes sense that a major correction would start from that area. But the market doesn’t make sense, and will do what it wants regardless of my opinion.

The best way to approach it is to expect a correction, and let it happen without too much concern. The fact is the market looks quite strong here. The trend is headed higher, and that’s bullish.

So keep this in mind when the correction does get underway. And ignore the bearish voices that will talk about the ‘Trump rally’ turning into a crash.

On that note, let me show you a chart of a stock that I call my ‘credit crisis barometer’. I’ve been tracking this for my subscribers at Crisis & Opportunity for the past few years…and I wrote about it in Markets and Money last year too.

The rationale is that if another credit crisis is REALLY brewing, you’ll see the evidence surface in certain companies’ share prices first. In other words, the market will throw off warning signs that something major is going down.

If you follow these signs, you won’t get out at the top (no one can do that) but you will get out before the proverbial hits the fan.

And if you want to be a decent investor, this is the attitude you need to take. That is, you can’t sit on the sidelines worrying about another credit crisis. You will simply miss too many opportunities.

And if you’re worried about missing too many opportunities and watching your life go by sitting in a miserly term deposit, the alternative is being in the market and stressing about the credit crisis that you expect (and know!) will hit at some point.

It’s stressful either way.

Stressed is not a good state to be in. It will probably kill you before the ‘next’ credit crisis blows your portfolio up.

But investing doesn’t have to be a stress fest. You just need to learn to let the market guide you. Which brings me to my ‘credit crisis barometer’ stock.

The company is Macquarie Group [ASX:MQG]. Every facet of its business requires the free flow of credit around the world. If credit conditions are tightening, you’ll see it in MQG’s share price.

But as you can see below, MQG’s share price looks very healthy indeed. Yesterday, it broke out to its highest level since 2007!

This chart tells you that credit conditions are getting looser, not tighter. If you cast your mind back to the heady days 2007, MQG was involved in an attempted leveraged buyout of Qantas.


Source: bigcharts.com
Click to enlarge

We’re nowhere near that point of financial recklessness at the moment, but MQG’s recent play at Tatts Group [ASX:TTS] suggests that things are heating up again.

At this point, you can curl up in a shell and think, ‘Here we go, financial stupidity is back, I’m outta here.’

But you can’t make moral judgements if you want to do well in the market. The fact is, the easiest way to make money in times of financial stupidity is to join in.

Just don’t drink the Kool Aid. Always keep an eye on the exits.

For the record, I don’t think we’re close to an exit point. Things feel like they’re just starting to heat up. That might make no sense to you, given the big rally global markets have enjoyed since the 2009 bottom.

But as I always remind you, markets only make sense in hindsight.

Governments and central banks are invested and involved in markets like never before. The intervention and manipulation has been extraordinary. Just last year, bond yields went negative across parts of the world, thanks to central bank buying.

And you expect the market to make sense?

To start getting bearish on the overall credit cycle, I’d want to see MQG’s share price start to reverse and head into a longer term downtrend. But given it’s just broken out to a near 10-year high, that’s a low probability outcome.

Playing the markets is akin to playing probabilities. Making big bets on low probability outcomes is high risk. In the same way, betting on another credit crisis right now comes with a very large opportunity cost.

I know it’s a pervasive fear. But there is simply no evidence of another credit crisis unfolding anytime soon.

We’ll get a correction, for sure. But a correction is not a crisis.

Regards,
Greg


Greg Canavan is a Feature Editor at Money Morning and Head of Research at Port Phillip Publishing.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

Official websites and financial e-letters Greg writes for:


Leave a Reply

Your email address will not be published. Required fields are marked *

Money Morning Australia