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Henry Jennings on why this time is different

Analysts say that every time, and after many years in the market and seeing many pullbacks, corrections and crashes, it is nearly always the same. Markets remain hostage to human emotions - fear and greed. Even the computer programs are ruled by this, mainly because they are programmed by humans. They move faster and have less emotions when they execute, but when they panic, as with humans, they still panic. Program fear in, get fear out. And now everything is connected to everything.

This recent sell down from 7600 to 6600 on the ASX 200 has taken place in two months. At Easter, all was well. The storm clouds were gathering, but central banks were sticking to their ‘transitory’ story, happy to play the ‘Rip Van Winkle’ card and to wake up when all that nasty inflation has gone. That strategy failed and as with all previous corrections and pullbacks, the central banks are at the heart of it. Yet ‘In the Fed we trust’. So far, they have been asleep in the Catskill Mountains and been woken early to take care of business. Like many, they have been running around like crazy things trying to rewrite the narrative with the Fed heads saying, ‘I told you so’ and Powell didn’t listen. 

Nearly every ‘dislocation’ in market valuations is triggered by central banks. Back in 1987 (my first experience of a valuation crunch), it was the German central bank which moved the goalposts; during the 90s, it was the central banks attacking inflation that caused the recession. In the GFC, we saw the central banks absent themselves from proper oversight and fail spectacularly to appreciate the lengths Wall Street bankers would go to in order to make extraordinary amounts of money. And then lose it. And then claim to be too big to fail. Please can you bail us out? Please?

For investors now, it is about when will we find the bottom. Bottoms are hard to pick. There will be signs, but they will be in the rear-view mirror and long gone, as the market rallies. So we are all groping for a catalyst, a turning point, something that will change the narrative. With the Greek debt crisis in 2012 and the assault on the euro, it was Draghi’s ‘Whatever it takes” moment. With the GFC, it was the central banks that cut rates aggressively and finally a coordinated global stimulus package announced in April 2009 worth US$5 trillion. Any problem is easy to solve if you throw enough money at it. It is the SOP in most instances - but it causes issues down the track. Pandemic? GFC? Print money. EU crisis? Print money. Brexit issues? Print money. For me though, the pandemic turning point was not a central bank or government stimulus plan - it was when Tokyo postponed the Olympics. Peak CV10 negativity. Maybe just a coincidence.

 

So here are some of the signs to watch for:
  • Central banks pausing rate hikes.
  • Inflation starting to peak and fall. 
  • This is the most important one – the oil price. Whilst oil is $115, it affects everything.
  • Ukraine cease fire. Oil collapses. Sanctions will remain though.
  • Cathartic high volume sell off. Still not happened yet.
  • Spike in the VIX index in US. It has been very constrained considering.
  • Australian 10 -year yields at 3% or below.
  • US and Australian reporting season guidance improves. 
  • An absence of crypto fails. Both platforms and funds. Confidence stabilises.
  • Unemployment rises back above 5%.
  • International student arrivals pushing back up to relieve job shortages.
  • Job ads starting to ease. Job losses accelerate. Starting to see it in IT and Tech start-ups.
  • Triple bottom to match triple top we saw in last year.  6400 could be target for bottom.

 

Any one of these could be the trigger. Any combo could see the bottom. You may get lucky and pick it, but it will be just that - luck. Better to climb on board the train after it has picked up a little steam.

So, what to buy when it bounces?  Plenty of highly shorted stocks that will bounce hard and fast. Unfortunately, there is usually a reason there are shorts, so you may need to be quick on your toes. In and out. Banks will be a large part of the bounce, particularly Commonwealth Bank (CBA) and National Australia (NAB) together with Macquarie Group (MQG). If you want to cover the index and are willing to leverage the bounce, the ASX 200 leveraged ETF (GEAR) could be worth a look. Goodman Group (GMG) could work for the eCommerce play and has a quality management team. Plenty of bombed out industrials too - Premier Investments (PMV) has the best retail management in the business. Other discretionary retailers have been hard hit yet retail sales are at records still. QANTAS (QAN) would be another to benefit from much lower oil prices if and when it happens. James Hardie (JHX) has been hurt on the US housing slowdown, but a lift here could help. In tough times, people don’t move but do renovations perhaps?

Of course, if you are looking for more adrenaline fuelled targets in a concerted bounce, there are plenty of BNPL/Tech targets that have bombed. ZIP has its attractions given the progress it has made accumulating customers of some questionable quality. Other techs have also been badly mauled, so hard and fast rallies will happen in our own tech sector.

Finally remember that this fall has seen low volumes and many players are on the sidelines plump with cash and waiting to jump. What will be the sign? Picture a rally if the Fed said, ‘enough is enough. We will pause and reflect’.  The trickle of money coming in from retail investors could turn into a flood from institutions and hedge funds. Just need to be patient and wait for the change in sentiment.   

There is no hurry. The biggest and most neon of signs will be the oil price. Whilst that is high, be wary of bear market rallies. Being patient is not easy, but it will reap rewards. Bear markets can be tough, but they also do set investors up to ride the bull when it comes. And it will come. They always do. Nothing different about that.

 

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Analysis as at 04 July 2022. This information has been provided by Marcus Today (AFSL is 473383), for WealthHub Securities Ltd ABN 83 089 718 249 AFSL No. 230704 (WealthHub Securities, we), a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 (NAB). Whilst all reasonable care has been taken by WealthHub Securities in reviewing this material, this content does not represent the view or opinions of WealthHub Securities. Any statements as to past performance do not represent future performance. Any advice contained in the Information has been prepared by WealthHub Securities without taking into account your objectives, financial situation or needs. Before acting on any such advice, we recommend that you consider whether it is appropriate for your circumstances. 

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Henry Jennings , Marcus Today

Marcus Today is a stock market newsletter founded by Marcus Padley over 20 years ago. Its key contributors have a uniquely open and honest writing style and are known for ‘telling it how it is’. The Marcus Today website also contains resources including educational articles and a stock database. Marcus Today has four feature areas: Strategy, Portfolios & Stock Ideas, Market Overview, Resource Tools and Education. Marcus Today's AFSL is 473383.

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Henry Jennings

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