The vibe is changing. It’s been a great rally but I can see (on the charts) and hear (in the headlines) the herd stopping to think about what’s next and it’s probably not great.
As my colleague Henry put it, we always come out of Easter fat and happy, then it all goes wrong. What is spooking Henry perhaps is his innate understanding of this chart which is the seasonal chart of the All Ords since 1988 not including this year. As you can see the market usually peaks at Easter and drifts until late June. Specifically, the chart peaks on April 26 – and bottoms on June 27.
Whilst I abhor the use of past statistics as a prediction for the future and I would never sell a thing on this sort of weak voodoo alone, it is mildly interesting - we are running into the gloomy zone of the stock market’s calendar year.
In the last few days we have been doing some cashing up - on the 16th April we cashed up to 15-20% and this morning (21/4/2020) we have cashed up to 35-40% again which includes some profit taking on recent highly profitable positions.
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The logic for taking some profits:
- We want to run up cash so we outperform if the market tips over again and have some cash to deploy when it does.
- We are a fund manager judged on relative performance, so for us holding some cash means we outperform a falling market.
- The ‘pause’ we detect is not a significant pivot point as it was at the top and the bottom - this is a slowdown in a high velocity recovery rally.
Reasons to get a bit more cautious:
- The US market has already returned to the middle of the bull market trading range with $23.83 trillion worth of S&P 500 stocks trading on the fantasy world PE of 21x and that's despite significantly lower earnings expectations. The US market could have arguably lost 20% on sentiment alone even without coronavirus…but with coronavirus it is now above the bottom of the long-term bull market trading range.
- Amazon and Netflix hit record highs last week on PEs of 103.2x and 109.8x.
- The herd is sobering up. You can hear it in the headlines. The bulls are tiring.
- The rally has been a sentiment recovery – that only lasts so long.
- The one metric that turned the herd was those exponential curves flattening. This flattening is now ‘in the market’. Discounted.
- To follow through the rally needs to be supported by "value" as well. Value is currently unknown. Earnings are in flux. There is no reliable foundation to the market yet.
- The economic headlines are going to deteriorate significantly from here. Jobs numbers, consumer spending, retail sales, GDP, they are all crashing. We just haven’t heard the numbers yet. They are coming. In fact they are here...this is from our Overnight US Market commentary one morning last week:
US retail sales posted a record decline in March. March Industrial production fell the most since 1946. NY Fed manufacturing hit a record low in April, while homebuilder sentiment fell to the lowest level in seven years. The Fed's April Beige Book said economic activity contracted sharply and abruptly. Big provisions for credit losses were the takeaway from bank earnings.
- The next few weeks are going to be littered with company announcements as they (try to) quantify the damage for us. That’s likely to include a litany untimetabled, unpredictable, company announcements as they try to communicate expectations, and almost all of them will be downgrades. There is heightened individual, specific stock, announcement risk.
- Charts – Some market and stock charts are topping out for the first time since the bottom. This is a Heikin-Ashi chart of the ASX 200 showing the topping out:
- We were beginning to get back to normal, but some of the recent European and US market falls are not ‘normal’ - the herd is turning again.
- VIX volatility index is on the rise again. First time in a while. Not significant yet, but watch it.
- We have some tremendous profits to take from the last few weeks on some of the stocks we bought on the lows.
- We retain neutral bank holdings going into results. The sector is down
45% still and is discounting a lot of bad news already including higher bad debt
provisions, narrower net interest margins and reduced or passed
- We still believe that in this end this episode has been a (and may present an even better) long term buying opportunity.
- We are pretty sure we have already seen the bottom as of March 24th. But we make no grand predictions.
All of this is enough for us to just take the top off things short term.
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April, 2009: households across Australia start receiving $950 cheques in the mail in line with the Rudd government's efforts to stimulate the economy in the wake of the Global Financial Crisis. In all 8.7 million individuals receive cheques, totalling around $8 billion dollars. From the 1st of April 2009 to the 1st of June of the same year, the All Ordinaries index jumps from just over 3500 to 4000, a rise of nearly 15%. April, 2020: In line with the Morrison Government's relaxation of the superannuation rules, as many 800,000 Australians each withdraw up to $10,000 from their super accounts, totalling almost $8 billion. May, 2020: 6 million Australians receive their first payment as per the Government's Jobkeeper stimulus measure. The first Jobkeeper payment is backdated to the 31st of March, thus each individual initially receives a payment of over $3000, at a total cost of $18 billion. Around $26 billion dollars will arrive in bank accounts of millions Australians over the next few weeks, either as a result of early withdrawn super or as part of the initial Jobkeeper payment. Even when you factor for inflation, this is around 2.5 times the size of the 2009 Rudd stimulus payments. We know what happened to Australian stocks after the $950 cheques started reaching Australian mailboxes back in 2009. Surely it would be reasonable to assume that with a significantly larger pool of money set to arrive in bank accounts across Australia in the space of just a few weeks, this is likely to have a comparable positive impact on the local stockmarket? I find it puzzling that no one seems to be paying attention to this.
March to June bounce may well be a coincidence Patrick because both Wall St and the ASX had bottomed early March 2009 and there was nowhere to go except "Up" after both markets bottomed. One could be right for wrong reasons too.
Not sure the Rudd payments were in any way connected to a 15% rise in the stock market in 2009 - they were unrelated. The Rudd payments arguably had no impact on the stock market which was playing follow the leader with the global equity markets. So the logic doesn’t follow that the stock market will rise as cheques land. The money is not being invested - it is replacing lost income - as one article says it’s compensation not stimulus - I don’t see it as a stock market influence I’m afraid.
Regarding the early withdrawal of funds from superannuation - is it known if the funds affected have begun liquidating assets including equities or are they obliged to wait until that April 20th date to begin selling? Thanks.
I agree with you Marcus. A look at the DJIA for 2009 indicates it bottomed in the week ending March 6 2009. It then began rising steadily. The All Ordinaries reached its bottom one week later and then followed the DJIA by also steadily rising. Had the rise, as Patrick suggests, been linked to the stimulus payments people received in 2009 then one wouldn't expect the two markets to be in synch since no payments were received by people in the USA. Other larger macro forces at work I think.
Patrick, withdrawing $10,000 from super is selling stocks, not buying. And do you really think unemployed people getting $750 a week government handout are buying stocks??
I don’t know your firm but must say your comments today are good commonsense observations and unbiased.i will subscribe to your podcasts. thanks, bryan
I'm not sure Patrick is suggesting they would be buying stocks with the handout, I think he's talking about the effect the extra spending will have on the economy and business bottom lines in general. I stand to be corrected though, and I agree with Marcus, I don't think they are related.
MARCUS TODAY GOT IT SO RIGHT ! THE MARCUS EXIT: 24th and 25th FEB …..WAS SENSATIONAL TIMING….The Marcus Exit was a gem….classic timing….it’s what we have come to expect from a professional team of “active” stock market experts. THE MARCUS ENTRY: 24th and 25th MAR …. The early call was made to re-enter the market on 24 March’20, followed with an “ALL-IN” call the next day on 25 March’20. The first entry call on 24 March was extraordinary ....near perfect timing ! Now, as a long-term member, that’s what I really like about MARCUS TODAY ……clarity, flexibility, prepared to change, exiting if/when needed, being specific, making timely decisions …..and most importantly, being ACTIVE and not passive participants in the stock market. If I had to use just one word to describe what I really like about MARCUS TODAY’S approach it would be, “PRAGMATIC” There have been some good short-term (for me) buying opportunities during this near four-week rally. However, will not completely discount another possible pullback/correction yet, remembering that our ENTRIES (BUYS) are only as good as our EXITS (SELLS). If some stock market expert says that you can't time the market (and when it's the right time to buy and sell stocks), then find someone who can !!!! All the best.
Why doesn't the growing liquidity crisis and the end of the Fed Put as a result worry you?