The markets have had a rough time of late and yesterday the combination of Ben Bernake talking about a slowdown in printing dollars and a weak PMI figure out of China resulted in all major stock markets falling with the Dow Jones slumping by more than -350 points overnight. Ouch!
Closer to home the ASX All Ordinaries Index (XAO) finished yesterday down around -2% and below 4800 points. Gold has also been hit hard and is currently trading just under $1300 USD (per ounce) which means my repeated calls that gold was not going to hit $2000 any time soon and would probably end up closer to $1000 was pretty much on the money.
It’s true that I have been wary of gold for a long time mainly because getting the timing right is quite difficult. Certainly if an investor had pounced on gold when it was trading below $1000 and then sold when it was up near $1800 then they would have made a tidy profit. But curiously many of these amazing trades are disclosed some time after the price highs & lows are clear for all to see.
For the rest of us mere mortals timing when to buy and sell is a lot harder to do and I imagine there are many gold investors nervously watching the price plunge towards $1000 at the moment. Even more unfortunate are those who perhaps ventured into a gold mining stock like Newcrest (ASX:NCM) which has seen its share price savaged recently.
But is the current market correction a surprise? Did it catch everyone out? The answer to both these questions is a resounding no!
Back in February for example I wrote:
“During the last three years the Australian stock market has flirted with the 5000 level four times which includes this most recent flirtation. However each time it has reached the 5000 market it has been unable to hold at that level and has on average has fallen back around 10% fairly quickly after that mark was hit.”
In that article I mentioned my concerns about the Chinese economy and Quantitative Easing (QE) in the U.S. and that I expected both of these factors would end up dragging the markets down.
The Chinese economy has probably peaked or maybe a better term would be “over-peaked” and the U.S. is playing a risky game of looking to ease back QE while the economic recovery there is patchy at best.
As for Europe – it’s a mess and the EU economy will probably end up struggling for years
Back in February this year I concluded the article mentioned above by saying:
“So where will the ASX All Ordinaries go from here? Well my guess is that once again it will flirt will 5000 and then fall back around 10% or maybe more. I have no idea when this will happen and it is also quite possible the XAO will keep pushing higher but at this stage I am still more inclined to take profits than to take long positions.”
As I have said repeatedly, I don’t claim to be able to pick the day, week or even month of when the market will turn but I hope to be able to work out the longer term trend sometimes and this time I got it right. Although when you take into account the issues related to China and the U.S. was it really a hard call to make? No, not really.
Did market watchers really expect the Australian stock market to keep heading up? Some did, as did many finance columnists & market analysts who are now coming up with reasons why this correction was unexpected. Rubbish!
So what will happen now? Well in all likelihood a little bit of panic will creep into the markets and with the end of the financial year upon us there will be some silly selling. In a normal world I would not expect the ASX All Ords or S&P/ASX 200 (XJO) to dip much below 4400.
But there are some rumblings about cracks appearing in the Chinese banking system (again hardly a surprise) and a string of bad news could send the market down near 4000.
Now before I go on let me stress again – I am not aiming to provide financial or investment advice and that is not my line of business. What I write about are my own observations, forecasts and my analysis of the market. So what follows is just that. I do not have a fully functioning or even semi-functioning crystal ball.
I would say that if the market dips below 4400 then it will be blue-chip stock buying time especially regarding stocks with good dividend yields and steady cash-flows. For example if Telstra (ASX:TLS) fell near $4 then I would be tempted and/or maybe the Commonwealth Bank (ASX:CBA) under $60.
I would not be charging into these types of stocks, just nibbling.
Yes their stock prices may fall further, but a stock that pays a good dividend makes me less stressed about shorter-term prices movements which for me, covers a time-frame of 1-2 years.
If I become a little more emboldened, I may start trying to catch a falling knife by venturing into mining stocks. But this is a high risk approach and in the past I have had my fingers burnt doing this. (e.g Babcock & Brown)
What will I do if the market kept falling? Well in my case I would not be selling as I am never a fan of joining the rush towards the exit, but rather I would be scanning the blue-chip stocks again with a view to taking positions in good quality stocks which I hope would rise at some point over the next 1-2 years.
But please remember; this is just my current thinking and I am certainly not suggesting that this is a strategy for others.
Market corrections are normal and happen often. Since the GFC they may appear to have rolled along more frequently but I am not sure that is the case.
Personally I think it’s more likely that stock market investors are just a little more on edge these days which is not helped of course by the usual media hype associated with any stock market pull-back.
If it all gets a bit much, then the only advice I will give is that maybe it’s time to get away from the computer, stop looking at stock charts etc and enjoy life a little!
Finally let me conclude with a quote from Peter Lynch:
You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.