I have returned from a trip to the USA to find equity markets in turmoil. The bond markets had been warning of this turmoil since late January as I highlighted in late January in my ShareCafe article here. The question now begs is it time to wade back into the market?
The answer to this is always dependant on what you are actually buying. If you are buying gold and considering I am a long-term gold bull, then the answer is yes. That has been the case for two years now. However, if you are looking at specific small-cap and mid-cap companies that will largely depend on what specific business you are buying – some I am comfortable buying right now – there are some exceptional companies at “sale” prices. Others that I have never liked – the answer is always no. Not particularly helpful. Finally, if you are talking about the broader indices, I am not convinced its worth the risk right here, right now. There is still likely to be more volatility in the pipeline.
Let me explain.
First, I don’t think equity valuations have returned back to levels that are cheap or even fair value. The buy the dip mentality has already seen in stocks like Coca Cola, Apple etc which rebounded initially very strongly but are now “tired” and at risk of another wave of selling. In a bigger correction the first dip isn’t usually the one to buy.
Evidence from the last major sell-off in the last quarter of 2018 on fears the global economy would stall as a result of the Federal Reserve raising rates too aggressively, shows that while some “tradeable bounces” do occur, these inevitably lead to lower levels until a final capitulation occurs.
Second, two weeks after the sell off we are still seeing 1,000 point swings in the DJIA and volatility remains elevated. The speed of the sell off as well – a record in time of just six days to drop from a record high to a 10% correction – does make this rather unprecedented. And with such a rapid fall, if it was to be a quick dip I think we should have seen the rebound already well underway. The ASX 200 is hovering at the lows, with banks struggling in this ultra-low interest rate environment.
Third, before I left on my trip to the USA I wrote a February road map for the traders in the office where in keeping with my comments in this column, that a correction was due. My analysis suggested February could see some steep sell offs with the S&P 500 declining back to 3050/3000 and the ASX 200 potentially 6300 in a coronavirus panic. Those targets in the USA have been exceeded and without where I would expect many over price stocks to have fallen to. Many of these over priced stocks still have lower levels in my view to reach which only translates to potentially lower levels for broader markets.
The ASX 200 is back to around the 6300 level but has shown zero ability to bounce. I am concerned about that. I think that means 6000/5900 is the next major support region the index will want to test and the S&P 500 could reach 2800/2730.
On a positive note though, I am thinking the banks will be coming to an attractive buy soon and Sydney Airports too on any indications of a dividend cut- that dip will be one to buy for the long-term. I am happy to continue buying Adveritas (AV1) and have been doing so. The Helios (He8) drop I think is just as ridiculous as the run on toilet paper.