The Seven-Year Equities Bull Market Lives On

The US stock market is trading near all-time highs. Yet the ASX 200 has traded sideways all year.

The disparity shouldn’t surprise you. Our market is a proxy for the mining and financial sectors. When those sectors perform well together, so does the ASX 200. That hasn’t happened for a long time. And while that’s concerning, the prospect of a rocketing US stock market is also causing trouble.

One of my friends asked me over the weekend if he should sell all his shares, as he thinks there’s going to be a stock market crash.

My short answer was ‘not yet’.

I believe there will be a 30% stock market drop. And while I don’t know when it will happen, I don’t think it will take place this year. That’s why your best bet as an investor is to go with the flow. Of course, you shouldn’t rule out a smaller 10–15% correction in the months ahead. But, if that happens, you should see it as a buying opportunity.

Looking at the charts today, there’s no indication that stocks will fall anytime soon. With that in mind, there’s no reason to sell all your shares. In fact, you should still be looking for promising new stocks.

Ignore the mainstream

Of course, not everyone agrees. That’s what makes investing so interesting. Thomas H Kee Jr — a former Morgan Stanley broker — wrote in MarketWatch last week:

I have, in previous articles here on MarketWatch, pointed out the fundamental risks in the U.S. stock market.

I have identified the liquidity risks created by the European Central Bank and the Federal Reserve in the tightening of monetary policy, in the reduction of the Fed’s balance sheet, and the likelihood that these risks will prick the asset bubble that the market is in today.

Most people I speak and email with agree. The risks are high, as the price-to-earnings multiple of the S&P 500 (about 25, depending on the indicator) is far greater than its historical norm (14.5). The truth, however, is that no one knows for sure. But, still, people are apathetic.

‘In fact, my experience over the past 20 years and through each of the past two major asset bubbles (the internet bubble in 2000 and the credit crisis in 2008–2009), is that the unanimous identification of an asset bubble did not take place until after the asset bubble had burst. By that time, all of the major indices — the Dow Jones Industrial Average, S&P 500, Nasdaq, and Russell 2000 — had already fallen.

The result largely handcuffed investors to investments that were severely underwater. As luck would have it, though, after the credit crisis, the Fed’s policy-making body printed $2 trillion and, with that money, bought assets to prop up the economy and save investors from destruction.

I’ll spare you from reading a story that hasn’t changed for seven years. Central banks have pumped markets with cheap money, which has temporarily propped up the world economy. The world can’t live on artificial money forever. That’s why global stock markets are expected to crash.

Unfortunately, while the story sounds credible, you should use common sense.

Algorithms and traders — and not opinions — dictate where the market moves. They both react to news headlines, which haven’t been that bad recently. Central banks are moving towards raising interest rates and exiting their money-printing programs. Most people see that as a positive.

There also haven’t been any major defaults across the financial system. Before the 2008 financial crash, there were plenty. So, while there are definitely problems brewing in the background, where’s the immediate risk?

I can’t see any.

Algorithms and traders are buying positive-news headlines. That’s why the stock market is pushing higher. Fund managers, pension funds and central banks are also buying stocks.

The music hasn’t stopped at the party. There’s no reason not to buy shares…

That investment decision will change when the news headlines get significantly worse and defaults begin to take place. Algorithms and traders will be the first to exit, which is likely to result in a sharp selloff. Institutional investors might not react until it’s too late.

But, until something changes for the worse, go with the flow. There’s absolutely no indication that stocks will collapse soon.

Technical analysis

Take a look at the Dow Jones weekly chart:

Dow Jones weekly chart- stock market rally dating back to February 2016.

[Click to enlarge]

The chart shows the stock market rally dating back to February 2016. There was a risk of a correction before Trump won the White House in November. Before that time, the Dow Jones was trading below the lower pink support line. Today, the pink uptrend channel remains intact.

Only a weekly closing below 21,169 points — the February high — would indicate the likelihood of a smaller 10–15% correction.

Don’t expect that to happen soon, mind you. The Dow Jones will be at 22,500 points — the top of the channel — before you know it. That should bear good news for the Aussie market, which continues to struggle.

If you own any small-cap or junior resource stocks, there should be a fair bit of interest in that sector for some time to come.

The bottom line: Don’t sell all your shares. And don’t be afraid from taking what could be a highly-profitable punt on the smaller end of the market!


Jason Stevenson,
Editor, Markets & Money

PS: If you’re looking for three of the best resource stocks on the ASX to buy now, go here.

Jason Stevenson is Markets & Money’s resource analyst. He shares over a decade’s worth of investing and trading experience across resource stocks and commodity futures and options. He originally studied accounting and finance at Curtin University, where he was awarded a first-class honours degree. His professional background stems across high-net-worth, top tier accounting (corporate finance, tax and auditing), and sell-side equities research. Before joining the team at Markets and Money, Jason worked at boutique firms which advised fund managers and high-net-worth clients on where to invest. Whether it’s gold, crude oil, copper or an obscure metal like vanadium, you can rely on an in-depth analysis in Markets and Money. Jason also brings you extensive macro, political and geopolitical analysis from around the world. He leaves no stone unturned when it comes to telling the truth. Jason is also the lead analyst of Gold Stock Trader, a premium service for investors serious about precious metal stocks. Websites and financial e-letters Jason writes for:

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