What to sell (if anything)

The sell signals have been building on the charts for a couple of weeks both here and in the US. The dam burst a little bit overnight. The 1.65% sell-off on Wall St is not quite the 3% needed to really worry you under the Collins Class Rule (which is a bit of a joke if you take it out of context) and last night’s fall is eminently reversible in a world populated by presidential tweets, but a near 500 point fall on the Dow Jones after a dream 25% rally in three months, will pause the herd and any sell-off will self-fulfil. The herd is alert to the top now and traders will take profits.

This is the chart of the S&P 500 showing the recent RSI and MACD sell signals. This is only a daily chart (short term) but the falling momentum and peaking RSI on the weekly chart are very similar.

If you are going to react to the sell-off then here is the blueprint for a falling Australian market.

If you believe the market is going to go down on trade fears (with all these bullet points I have made a few stock suggestions - you can add a lot more stocks of your own):

• The Australian dollar will go down (as we worry about China).
• Australian interest rates will go down (as we worry about growth).
• The Chinese stock market will go down (it’s gone up a lot this year).
• The oil price will fall on global growth concerns – WPL, BPT, OSH….
• Resources will go down on global growth concerns – BHP, RIO, FMG, S32, AWC, BSL...
• Metal prices will fall on global growth concerns and the metal price proxy stocks will go down with them – OZL, WSA, IGO…
• Australian China facing stocks will go down – A2M, TWE, BAL, BKL, BUB, BWX….
• The big international fund managers exposed to the Chinese and Asian markets will underperform – MFG, PPT, PTM...

If you believe the market is just going to go down (not necessarily on trade issues):

• The mid-cap growth stocks operating on high PEs and priced with the benefit of the doubt (bandwagon stocks) will quickly see profit taking – WTC, APX, APT, Z1P…
• The high PE international industrials will underperform again if last year’s correction is anything to go by – CSL, COH, RHC, SHL, RMD...
• 'Stock market stocks' will sell off - MQG, HUB, PPS, IRE, GBT, CPU, BVS, ASX, NWL...
• Interest rates will fall (on growth concerns) meaning the boring interest rate sensitive REITs, infrastructure and utilities will outperform as they did in last year’s correction. TCL, SYD, APA…
• Gold stocks will go up as they did in last year’s correction – NCM, NST, EVN…
• The Banks will outperform, especially ahead of the dividends next week – no-one will sell until then. See table for ex-dividend dates. 

It is your choice this morning whether you bother to react to a market that is peaking in the short term because at this point it does seem to be short term. There is nothing terribly wrong once again. The trade issue could be solved by the end of the week, growth globally is good not great but good is good enough, interest rates are not going up anytime soon anywhere, the US results season has been good, our results season (property market stocks exposed aside) should be okay, the market PE in both the US and Australia is well off the highs, which means any sell-off is likely to be short term and little more than a herd head fake.

Bottom line:

1. Nothing to concern investors yet.
2. Traders will be taking profits.
3. After the correction last year we will all be looking at any sell-off as a good buying opportunity if it develops.

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Marcus Padley is the author of the Marcus Today stock market newsletter. To sign up for a 14-day free trial please click here.