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A Stock Market Correction. So What?

June 21st, 2013 · Greg Atkinson · 21 Comments

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.”

Source:  The ASX All Ordinaries March Towards 5000 – Been There, Done That

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.

Greg Atkinson is the editor of Shareswatch Australia and Managing Director of Ohori Capital.  He currently works & resides in Japan. He can be followed on twitter via Follow @GregAtkinson_jp

21 responses so far ↓

  • 1 Richard // Jun 22, 2013 at 12:33 pm

    Based on recent events, are you changing your prediction for ASX200 by end of calendar year 2013 ?

    I think you previously predicted 4800 to 5200 ?

  • 2 Lachlan // Jun 22, 2013 at 1:30 pm

    I have my own long term predictions laid out however I like to do some short term crystal ball gazing.
    For now it looks to me that selling is in full swing short term here are my own approximate guesses for the coming period.
    AUDUSD 89/90 target
    Dow 14200 target
    ASX 200 4400/4500 target
    Gold and silver…too hard to call. Silver close to a long term support area around 20. Both are way oversold which is bullish…but on the other hand selling is the order of the day…. so not a good bet either way.
    NCM has had a good flush out to remove risk now.

    This is not trading advice and should not be used as such unless you like losing money. I don’t trade short term very often and consider it a game only for dedicated full timers and adrenaline junkies…just gentlemens bets here for the best part.

  • 3 Greg Atkinson // Jun 22, 2013 at 1:31 pm

    Richard I am sticking to that prediction. I am thinking the markets will eventually deal with the QE wind-back, take a hit from China then settle down again. Eventually when the dust settles and maybe the RBA cuts rates again, investors will look at stock more favourably. Well that’s the theory anyway 🙂

  • 4 Ross T // Jun 23, 2013 at 7:46 pm

    The dollar’s move downwards seems to indicate the market is still factoring in an end to the ALP/Green stimulus (an Abbot win in September). As for QE and the US economy – how can when trust Bernanke?
    I am staying out of the market until after September as I dont think its finished correcting.

  • 5 Greg Atkinson // Jun 24, 2013 at 9:33 am

    Ross it looks like stocks will take another hit today & I can see much on the horizon to give them a boost unless Ben changes his mind. I doubt even another rate cut from the RBA will help much either.

  • 6 Richard // Jun 27, 2013 at 3:30 pm

    Well it seems like the correction may have abated for now.

    Interesting to see what happens over the next few days, but maybe the selling wave has finished.

  • 7 Greg Atkinson // Jul 1, 2013 at 9:02 am

    Well some of the end of year selling will be over now Richard so it wouldn’t take much to get the market back up to 5000. Also the big mining stocks have fallen quite a bit so we may be getting to a point where the slowdown in China has been priced into them.

    Perhaps the next things to rattle the markets will be further developments about the tapering of QE in the U.S?

  • 8 Lachlan // Jul 1, 2013 at 1:17 pm

    Some excellent images here of China on the video. I think they have a way to go yet myself but regardless what one thinks of this you just gotta enjoy the spectacle.

  • 9 Greg Atkinson // Jul 1, 2013 at 1:43 pm

    Lachlan I saw enough of what was happening in China during my business trips in 2011 & 2012. You don’t need to head into a “ghost” city to see over-building…plenty of that in the Tier 2 cities.

    Anyway I have been a China bear for a while as I wrote back in 2011: The China property bubble and an economy hooked on growth.

    Now it seems the Chinese leadership is talking about GDP growth not be the focus of their efforts so standby for the slowdown to be officially acknowledged…but planned of course 😉

  • 10 Lachlan // Jul 1, 2013 at 2:42 pm

    It was interesting to see how they tolerated people standing in the way of progress.
    I have always said China would have an ordinary recession. That goes with the monetary territory. Its only my intention to point out that they are gaining many of the things which other major economies are losing and there needs to be a balance attained there. I know you are not saying anything extreme Greg but a lot of blogs seem to be implying that China will suddenly be the USA or Greece tomorrow.
    “Doomer porn” they call it 🙂

  • 11 Lachlan // Jul 1, 2013 at 2:47 pm

    “but planned of course”
    no doubt and these days we’re all in that boat I guess
    You can possibly see that happening on the video where all the workers have disappeared from the new city project 6 months ago.

  • 12 Biker // Jul 1, 2013 at 6:53 pm

    Planned vs Winging It…

    You’ve got to acknowledge that a totalitarian regime which plans its people’s economic rise has a great deal going for it…

    Opposing that, of course, are its lack of tolerance of dissent and the forced movement from rural living to city dwelling.

    We tend to make comparisons between China and western nations. It may be more appropriate to compare China to the Indian sub-continent, or even Africa. I think I’d rather the restraint and control of China as it modifies its plans to meet changing economic circumstances, than the less-organised muddling chaos of India, or many African countries… .

  • 13 Lachlan // Jul 8, 2013 at 5:52 pm

    There is fair chance the USDX may spike a few cents or so. Just something to watch out for anyhow. Its had a powerful return from its last pull-back.

  • 14 Greg Atkinson // Jul 10, 2013 at 7:02 am

    You may be right Lachlan but although our stock market has been jumping around a bit when I look at the VIX it seems relatively calm in the U.S. The U.S. markets it seems are not getting bounced around by the economic news seeping out of China which may or may not be a good thing.

  • 15 Lachlan // Jul 10, 2013 at 1:05 pm

    I had a look at some charts last night Greg. Oil, gold, Dow, ASX200, AUDUSD, CBA, and some others. Without getting too technical they generally looked like they want a bit more downside or volatility but after that’s over the longer term trend looks bullish to me. So intermediate trends may resume bullish to higher highs. And keeping in mind that market pessimism is ubiquitous now.
    Coal miners here in QLD….especially central QLD are sacking thousands. And yet they are looking forward to a new rally after 6 months or so. This seems to me no sure thing, I don’t want to be dogmatic but in general markets do work this way. A shake-out is never complete until people get very pessimistic. And there are good reasons for such.
    Amongst the reasons is the bond bubble. I know it wont be there forever. I also believe that betting on its demise at any particular time has been a losers game. Obviously the banks all want to preserve the status quo but there are no signs presently imo that will end in a short term time frame. Rates have spiked before. Even if rates do go up so too can inflation.

  • 16 Lachlan // Jul 10, 2013 at 1:06 pm

    Telstra looks good for a pull back too.

  • 17 Greg Atkinson // Jul 11, 2013 at 4:34 pm

    Well Lachlan here we are again above 4900 largely thanks I would say to the U.S. Fed back-tracking on the tapering front. Seems the dollars will flow for some time yet.

    That seems to have supported commodities as curiously the Australian stock market has now brushed aside some pretty poor import/export data out of China earlier this week.

    As for coal…I think there is going to be a supply glut covering coal and other fossils fuels which will be exacerbated as the nuclear reactors start coming back online here in Japan. (in addition to the two already in service) Seems the glory days for the Australian coal industry are over for now.

  • 18 Lachlan // Jul 13, 2013 at 7:07 am

    The computer algorithms maybe react to what Ben says for a brief change of course. I am sure he will keep the monetisations happening though. Why not? Everyone else is. What can go wrong? As for tapering, I seriously doubt it will happen for real….well not unless they actually want to see a sharp collapse. That would be like telling the market to sell everything before you get completely hammered. I gather that “taper talk” itself is just a way of telling the market to cool it for a bit so that any distortions do not get too large, too quickly.

  • 19 Greg Atkinson // Jul 16, 2013 at 1:34 pm

    Well the easy path for central bankers is to keep pumping money into the system and wait for things to improve. In any case, by the time things get really serious it will not be on their watch..they will be doing the lecture circuit to supplement their already hefty pensions by then. Nice work if you can get it.

    Anyway the All Ords are back near 5000 for no good reason..just bouncing along sideways again.

  • 20 Ned S // Aug 7, 2013 at 4:52 pm

    I always get a bit twitchy when I see our Oz or the US stock market fall 1.8% plus in a day.

  • 21 Greg Atkinson // Aug 7, 2013 at 5:02 pm

    Ned if the US stock market falls because there is a hint of QE tapering then it is probably going to be a bit ugly for a while when the tapering actually starts. If some economic news from China was added to the mix then it would be time to hang onto our hats as they saying goes.

    Still I don’t think we will get even close to the market low of 2009 and I would look at a major sell-off as an opportunity to get some stocks that I missed getting into earlier.

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