Trading with Focus – The big bad correction or a few bad days?
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Aaah. The good old ‘correction’ vs ‘not correction’ debate. I’ve called at least 7 corrections in the last 17 months, none of which happened, but all of which saw me top up my bear positions. Which are all still massively underwater.
But the ASX All Ordinaries is down 1.92% as I write this, and has been fading hard all day.
By the time this is published, the market will have moved on to another day so it all sort of relies on what happens tonight, on the overseas markets. And then it will be the day before the weekend. Which means there may already have been a reprieve.
But even if there is, I’ll guess the ASX market will still be a little jittery.
To judge this all correctly, I have to preface that the world really isn’t in a tiptop shape, but you knew that already. Or am I seeing only bad news because of confirmation bias, or is there actually some sort of general breakdown of society overlaid with a financial system that seems to be manufactured by some secret society for their own benefit.
And it’s all due to blow up.
As part of that preface, there’s an alternative view, as we also have to realise that there are a lot of companies making a lot of money, and something like the ‘All Ordinaries’ is not a general economic gauge, but just a weighted basket of the stock prices that make it up. And some of them will continue to make a lot of money, even if their share prices drop from here.
But you knew all that… you’ve considered the risks, you’ve hedged your bets, you’ll have a calm head in a bad market. ‘Cos you’re a serious share trader…
So let’s look at some charts.
The All Ords has been in an unbelievable unbroken run. Normally you can assume there’ll be a bit of a pullback each year, maybe 10-15%, so perhaps we just got that all out the way at once at the start of last year, or maybe we’re due. And if we look at this shorter-term trend, it could look a little scary as ‘what goes up that much can just as easily half in value’ – right?
Maybe, but probably not.
It’s not like we didn’t know there were problems, or that stocks were overvalued, or that Top 20 companies should at least make a real profit to get to that size. But on the other hand, all bull markets have to climb the wall of worry, and there was a lot of worry, so perhaps this length and size of rally was just justified by the width and depth of worry…
I’m probably looking too short-term on that chart to make any bigger assumptions, and it’s only one line, but… it hadn’t fallen through that line until today.
So let’s scale out a bit more.
Same index, but taking it back to the start of the new mining boom in 2016, and we see a different story. If you wiped out the Covid selloff altogether, you could argue that we are ‘on trend’ and maybe this is just a bit of a wobble above the long-term line.
But look at that wobble in 2018, when it was above the line. That ‘wobble’ was about 15% of a wipeout and I can’t even really remember what it was about… Took about nine months from whoa to go to get back on track, and there are a lot more people these days who are following their portfolio returns on a minute by minute basis!
So if this is the index, and mostly represents what the banks and the big miners are doing, then imagine what happens when specs get hit by a turn of negativity. They don’t have a dividend yield or a revenue model in most cases, they’re only worth what the herd reckons at any given time, and once all the first-timers get smacked out for the first time it will take a fair bit of confidence for them to come back again…
I mean, you saw how crypto got smacked the other night, right? Oof. It’s lucky there’s a few true believers to buy that dip.
I’m not going to go any deeper on trying to draw inferences from a one-line chart on a general index, y’all know what I am talking about. It’s never the right time to be cavalier with your money, but we have another 800,000 people in the ASX who have never seen a proper selloff, plus all the ones in the States who jumped on the online craze, the rise again of the highly leveraged hedge fund, a terrorist organisation that were just given unlimited funding and a fully functional war-machine and on top of that someone threw rocks at Justin Trudeau.
What’s not to worry about!?!
Well, there’s a few comforts.
The biggest company in Australia is still BHP. We still have extremely high commodity prices. It is still going to be very profitable, even if the iron ore price is lower than it was. Sure it’s ex-div, but its down nearly 25% already from its highs already. If they make as much money as last year, they’re on a 10% dividend yield – plus franking!
Not saying you should buy it (I don’t know you from a bar of soap!) but it’s my personal preference to buy things that aren’t at all time highs. And better than that, if it’s already fallen that much, how much lower can it go? Another 25%?
Maybe. But probably not.
It’s got dividend support from all the investors that are left in this market to whom dividends are king, and one average SMSF is worth at least 40 meme-traders, so it can scoop up the panic at their equivalent of a disco without blinking…
Fortescue is also down a lot already, and profitable, and paying out very hefty fully franked dividends to people in a low interest rate environment, and so is Rio.
So is this the beginning of a normal correction, a few bad days, or the end of the world? (I’m going 50/50 the first two, but not ruling out the last one…just yet…)
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