James Gerrish

Since June, buying the local market as it was sold off towards the 5600 area has proven correct, but as we all know nothing lasts forever, we are very cautious this time. Yesterday’s savage 49-point / 0.9% sell-off had no obvious lead and was pretty unexpected on all, but the most bearish trading desks. The selling kicked in aggressively at 10 am as the stocks opened, with 3000-SPI futures contracts being sold in just 6-minutes, this equated to 17% of the entire day’s volume in this particular market.

We’ve mentioned this early aggressive selling of the SPI futures a number of times over recent weeks and today we thought was an opportune time to ensure subscribers understand the implications to our underlying stock market which we are all familiar.

  • An SPI futures contracts value is calculated by the price multiplied by $25.
  • Hence at yesterday’s 9.50am open of 5689 one SPI contract was worth $142,225 (5689 x $25).
  • Subsequently when someone sells 3000 lots in a few minutes it’s the equivalent a portfolio of over $426m being dumped at market i.e. 3000 x 5689 x $25.
  • Yesterday’s total daily turnover on the ASX200 was $3,925,221,650 hence this one quick order was ~11% of the days total turnover before we even consider the huge % of day trading etc. within this $3.925bn total.

The SPI very often leads the ASX200 as it’s a quick and efficient way to buy/sell the overall market. If the SPI falls too far compared to the underlying index, arbitrage kicks in and computers buy the SPI and sell stocks, hence realigning market efficiency.

Obviously, we have no way of knowing who the seller(s) are of the SPI over recent weeks, previously we speculated it was an overseas fund manager taking advantage of the local market's performance in $US with the $A trading close to the psychological 80c level. However, the exciting factor is SPI selling leads to overall market selling and hence opportunities can arise in quality stocks e.g. Challenger (CGF) and Aristocrat (ALL) last week – both positions remain comfortably in profit - touch wood!

S&P ASX Share Price Index 200 (SPI) Intra-day Chart

The ASX200 closed just 23-points / 0.4% above its 20-week low, hence not surprisingly we remain comfortable with our short-term bearish projected pullback to the psychological 5500 area.

ASX200 Daily Chart

Thoughts on an Australian Recession

The average Australian has less money in their pockets than over previous decades and is spending less accordingly. The young are finding it harder to buy a house as prices surge aided by record low interest rates. Sydney is now the 2nd most expensive city in the world leading to 16% less 25-34 year old’s getting on the property ladder and this very same drive to own expensive real estate has pushed household debt to a record high. Australians retiring with debt will put increased pressure on the government welfare system moving forward, the net result:

“The Australian government / RBA cannot make many mistakes or we will see the first Australian recession in 26-years”.

Our concern is that the local economy feels like a crème brulee i.e. soft underneath and brittle on top. For now, things are ok but any decent fall in housing prices is likely to hammer consumer confidence leading to economic stagnation – us Australians basically expect our house to go up in value every year! Just consider what other countries have done to improve housing affordability – another way of saying making house prices fall!

  1. Singapore has experienced 3-years of falling prices following a number of measures including banning interest-only loans.
  2. Canada has seen prices plunge following measures like a 15% tax on foreign buyers in some cities.

The above 2 examples sound very familiar to what we have been hearing locally and it now feels prices have initially come off the boil. The underlying numbers show our economy is fine and the likes of the US and China are definitely helping, but we feel both the government and RBA are walking a tightrope with marginal room for error – they would love for house prices to remain static for at least a few years but this is not an easy scenario to engineer.

Overall, it’s easy to see why the ASX200 is unpopular on the global stage but this will ultimately lead to some amazing opportunities so it’s not all doom and gloom. For now, it’s important to keep our fingers on the pulse as the next few years look fascinating but only for the prepared and flexible.

We’ve said previously that we can see an interest rate rise on Melbourne Cup day in 2018 but it may be a case of “one and done” for a while as the RBA watch the housing market extremely closely.

RBA Cash Rate Monthly Chart


We remain happy to increase our market exposure into weakness but see no reason to chase stocks at current levels.


Please sign in to comment on this wire.
Medium photedited3

Patrick Fresne

Some interesting thoughts here; however, if you think that Australia is probably headed for a recession surely that is a reason to be optimistic about Australian stocks? A recession would probably lead to a weaker AUD against most other currencies, and given that a majority of listed stocks benefit (to some extent, at least) from a lower Australian dollar, you would think that would provide a boost to local stocks.

Medium 1220457

Peter Fox

Theres no doubt where headed for one its just when?

Medium photedited3

Patrick Fresne

Yes, that is the million dollar question.

Avatar fallback

Stephen Brocklesby

We are arguably in a recession and have been for some time, its only clever accounting that makes it look like we are not. The numbers we are shown do not pass the sniff test!

Avatar fallback

jim mawhinney

As I group up a farmer sat on my front fence and we talked about his block of land -selling at $5,000-will get more if I hold on -next year will the recession make it fall .My answer 1957 will come and go and more people will be around and the price will go up-same as shares.

See 2 more comments