On the Brink of a Bear Market

What do you do when you’re under political pressure for starting a potentially damaging trade war? You change the conversation and focus peoples’ attention on a real war, and cast yourself as the moral hero. From the Financial Times:

Donald Trump has led international condemnation of an alleged chemical weapons attack by the Syrian government, raising prospects of an American response to the assault that has killed at least 48 people in the rebel-held town of Douma.

The US president singled out Russian president Vladimir Putin in a tweet on Sunday, saying he held Russia and Iran, Syrian president Bashar al-Assad’s backers, responsible for the atrocity. He slammed the “Animal Assad” and warned there would be a “big price to pay” for the attack.

What’s been happening in Syria for the past five years or so has been a disaster, and every major country involved has blood on their hands. Oil, gas, and religion are the culprits. That, and the abhorrent human behaviour from all sides using Syria to get whatever advantage they can.

But money is our beat, not religion and politics. Thank goodness. And the market’s attention today will be on deteriorating US-China trade relations, which have the capacity to put a full stop on this long running global economic expansion.

Having said that, rather than make bets or definitive statements about what you think is going to happen, it’s best to consult the charts. The chart is a visual representation of the market. As Napoleon once said, ‘the only one who is wiser than anyone is everyone’. I wonder if he penned that while in exile in St Helena, in the Southern Atlantic Ocean, after reflecting on a life driven by ego?

Anyway, let’s have a look at a chart of the S&P 500 (below) and interpret what ‘everyone’ is trying to say. Note that the index has not yet broken below the February lows. That’s a positive. As a result, you could say that the S&P 500 is simply correcting and consolidating after two years of nearly constant advances.

But if it breaks below, say 2,575 points, then the chances of the S&P 500 going into a more prolonged sell-off — a bear market — increase markedly. Will that happen? I think it will, but that doesn’t really mean anything.

SPX Daily Chart. 09-04-2018 Source: XXX
[Click to enlarge]

In defence of the bulls, note that volume (the lower panel) didn’t pick up on Friday’s sharp fall. That indicates there wasn’t a big move to dump stocks, despite the scary headlines.

Let’s wait and see what happens. In the very short term, the market should rally. How far it can get before turning back down again will be interesting to see. And from there, keep an eye on 2,575 points.

Turning to the Aussie market, and we are looking in pretty poor shape. The ASX 200 is back in a downtrend, and looks like it’s heading back to the lows last reached in October 2017.

As you can see in the chart below, unlike the S&P 500, the local market recently made a new low, confirming the downward trend. Given the Aussie market hasn’t performed anywhere near as strongly as the US market over the past few years, this is a disappointing outcome. 

I put it down to a few things: a deplorable political situation, a banking sector in the midst of being exposed for its boom time excesses and, now, a mining sector under pressure from a potential trade war between China and the US. Given the Aussie market is overweight in financials and resources, its poor performance isn’t surprising.

AU:XJO Daily Chart. 09-04-2018 Source: XXX
[Click to enlarge]

Like the S&P 500, Aussie stocks are due for a rally. But the overall trend of the market is down, which means stock picking (rather than making sectoral bets) is the only way to make money in this market.

Unless, of course, you’ve had a crack at gold stocks over the past few months. It’s one of the few sectors where most of the stocks are still in solid upward trends. That tells you money is flowing into the sector. With the Aussie dollar gold price hovering around $1,750 an ounce, that’s hardly surprising. The gold diggers are making good money in this environment.

And with a trade war looming at what appears to be the end of the US economic cycle, conditions might be about to get better. To take advantage of this situation, click here.

Regards,

Greg Canavan,
Editor, Crisis & Opportunity


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:


Money Morning Australia