After a couple of weeks of fear and loathing on the stock market, the big question is whether this is the end of the bull market. And, if a bear market is about to start, just how deep and nasty will it be?
The first thing to understand is that no one knows the answer to that question. Not me, not you, not the world’s most connected central bankers.
The best you can do is weigh up the available evidence and make your plans from there. After all, we’re talking about the future. It’s pretty hard to predict.
But if you can process the data and not ruin it with your opinions and biases, you have a much better chance of being an accurate forecaster. That in turn allows you to make decisions with the benefit of foresight rather than react in hindsight.
One of my pet hates is reading headlines that say, ‘the market just crashed, here’s what to do now’.
Hang on, where were you two weeks ago, or two months ago, or at any point prior to the crash telling me to get out of stocks? Don’t tell me what to do AFTER my stocks have all splattered on the pavement!
If the author was prescient in their prior forecasts, then sure, read on. But if they’ve just popped up out of nowhere to tell you what to do when it seems a bit late for that, then hit the delete button.
That goes for me too. So before I continue, let me give you the ‘forecast’ I gave to subscribers of Crisis & Opportunity in December 2017. I devoted the report to explaining why 2018 would be very different from 2017 when it came to returns from US stocks.
At the end of that reasoning, I tried to put a little ‘prediction package’ together. I was referring to the US market, on the assumption that Aussie stocks would follow the world’s biggest market. Reading it now, it’s not THAT far off the mark. Whether it warrants you taking any note of what I have to say now is up to you to decide.
Anyway, here’s what I said about 2018 in December 2017:
- We get a short and sharp correction early in the year as investors take advantage of the Trump tax cuts that should come into effect on 1 January. As there hasn’t been a decent correction in years, a lot of investors are sitting on solid gains. The time to sell is when the tax on capital gains is lower.
- The market will recover from this selloff and make new highs. Perhaps around the second quarter. That will be the high for the year.
- The market will lose ground in the second half of the year. The peak-to-trough decline could be up to 20%…but I don’t think we’re heading into a multi-year bear market.
- Take all that with a grain of salt. The chances of me being right are very low. I’m trying to point out that 2018 will likely be very different from the past few years.
That looks like a reasonable call if you look at the S&P 500 or the Dow Jones Industrials. But there are still two months of the year to go. And these are traditionally bullish months for the market. So we could see a rally recover much of the recent losses.
Why the NASDAQ is the most important market index
What I didn’t say in the prediction piece is that the NASDAQ would probably be the most important index to monitor for signs that the bull market had peaked, and may turn into a bear.
Tech stocks have been the leaders in this bull market. That’s where the action is and where most of the returns have been concentrated. If the NASDAQ turns down, there is a good chance it will bring the rest of the market down too.
With that in mind, I have a few things for your consideration today. First, this news is about a month old, but it has more weight now due to subsequent events. From the Financial Review:
‘Is there a better sign of the times? Australia’s two richest tech entrepreneurs are now next-door neighbours and owners of the country’s two most expensive houses, after a record-breaking sale by the family of the once-dominant traditional media empire Fairfax for almost $100 million.
‘Atlassian co-founder Mike Cannon-Brookes, 38, and his fashion design wife Annie bought the Fairwater estate of Lady Mary Fairfax in Sydney’s exclusive harbour-front enclave of Point Piper after it was on the market for less than three weeks.
‘The property next door, Elaine, was until yesterday Australia’s most expensive house when it sold last year for $71 million to Mr Cannon-Brookes’ friend and Atlassian business partner, Scott Farquhar, 38. That home was owned by Sir Vincent Fairfax and later his son J.B. Fairfax.’
A sign of the times, or a sign of a top?
Altassian is listed on the NASDAQ. It’s Australia’s most successful tech company. The article above appeared on Friday, 28 September. Altassian’s stock price peaked the very next trading day, Monday, 1 October.
As shown in the chart below, the NASDAQ peaked on 30 August. It corrected and then tried to rally again. It made a minor top on 1 October before crashing around 13% (so far).
That’s a bigger decline than you saw earlier in the year. More importantly, the 50-day moving average (MA) is about to cross below the 100-day MA. That hasn’t happened since the mid-2015/early 2016 correction that saw the index fall around 20% over a seven-month period.
What am I telling you?
My guess is that the NASDAQ’s bull run is over. The moving averages are in the process of turning down, which is a visual representation of a change in investor psychology.
I think you could see falls of 30–40% from peak to trough, although my guess for the S&P 500 and Dow is that the falls wouldn’t be as severe.
But there will be plenty of decent rallies along the way. We’re probably due for one soon. They will be strong enough to make you think that the worst is over. That’s the nature of bear markets.
Having said all that, make sure you read point four again (above). It’s the most important one.
For Markets & Money
PS: Financial expert Vern Gowdie explores why a credit collapse could occur late in 2018, and how you can protect your assets. Click here for free action plan.