Wall Street sold off overnight, on concerns about North Korea and cautious comments from Federal Reserve officials about the health of the US economy.
The Dow Jones fell 1%, while the S&P 500 declined 0.76%. Bond yields fell sharply, and gold rallied.
The fear trade is on!
That means the Aussie market will fall again today. As you can see in the chart of the benchmark ASX 200 index below, Aussie stocks are losing momentum.
The chart doesn’t include today’s performance, but following the wrap up of reporting season, the market looks sluggish. If it struggles to move higher, then there’s a good chance it will move lower instead. And that’s what the market seems to be doing right now.
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What you want to see is support hold around 5,600 points (marked by the green line).
I think it will, but who knows? Let’s wait and see.
It’s not all bad news, though. Brent crude jumped 1.7% overnight, while the US benchmark, West Texas Intermediate, soared nearly 3%. Gold was up 1%, and iron ore prices climbed 0.7%.
So commodities should hold up OK. This sector has been one of the few bright spots in the market recently. While household names like Commonwealth Bank [ASX:CBA] and Telstra [ASX:TLS] disappoint, it’s the miners that are doing well.
Check this next chart out. It shows the ASX300 Metals and Mining index, a broad indicator of the performance of Aussie resource stocks.
As you can see, it just broke out to its highest level since 2014. That’s bullish. The resources bull market is well and truly on.
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The strong performance of iron ore and the majors that mine it (BHP and RIO) is an obvious driver of this bull market. But other commodities are joining in. Gold is trading at its highest level in a year, copper is at its highest level since 2014, while other industrial metals like aluminium and nickel are also strong.
This is what I was talking about yesterday when mentioning the effect of commodity prices on the Aussie economy. I said that strong commodity prices push up the currency, but that’s a reflection of economic health, and not something that the RBA should be worried about.
Sure enough, following its decision to keep rates on hold yesterday, the RBA eased off on its concern about the strength of the Aussie dollar. As the Financial Review reports:
‘On the currency, the bank appears to be less concerned about the impact of any potential appreciating, saying that if it were to rise it would slow the economic pick-up it has forecast and delay a quickening of inflation.
‘Unlike earlier this year and through most of 2015 and 2016, the bank is no longer warning that a stronger currency would “complicate” the nation’s post-resources boom adjustment.’
That’s one obstacle to an interest rate rise removed. That means the Aussie market will now focus on inflation to determine when the RBA will move next.
As the RBA expects it to take some time before inflation picks up, I take that to mean interest rates will be on hold probably until into 2018.
That’s good news. It means you should see the Australian economy continue to strengthen while interest rates remain on hold. It’s a good combination for the stock market.
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Why now is a good time to buy Australian Stocks
That’s why I don’t think you should be overly concerned about the current weakness in stocks. This is a good time to selectively buy while nervousness and concern keeps a lid on sentiment and therefore prices.
I would add a caveat to that though. In my Crisis & Opportunity newsletter, I only recommend stocks that are trending higher. This ensures you don’t buy into stocks that are heading south and likely to keep moving south.
Telstra is a good example. I know many people who thought it was a good buy six months ago (when the price was around $4.60) and then again in April when it fell to $4. Now, it’s trading around $3.65.
The Telco might be good value now. Who knows? But the impact of the NBN rollout is uncertain, and competition in mobiles (where Telstra is dominant) will only intensify in the years ahead.
That alone makes me cautious. Add to that the fact that the share price is in a relentless downtrend, and I wouldn’t touch Telstra here.
A stock that is trending lower tells you the opinion of the market is against the business. Why try and fight with the opinion of the market? Do you think you’re smarter than everyone else combined?
When I was younger and knew a lot more than I know now, I used to challenge the opinion of the market.
It was an expensive education.
Now I respect the market’s view much more. I know that to make money, you need to be on the side of the market. The trick is to get in early, then let the market take you (and your profits) higher.
You don’t do that by buying into a downtrend. Buying out of favour stocks in this way will tie up your capital and leave you in underwater positions for way too long.
Despite the weaker tone of the market, the good news is there are plenty of stocks trending higher. It just takes a little extra work to find them.
Editor, Crisis & Opportunity