In his 1923 classic, Truth of the Stock Tape, W.D. Gann wrote, ‘be a bear in a bear market and a bull in a bull market’.
After another pummelling for Aussie stocks yesterday, the evidence suggests we are now in a bear market. The ASX 200 and the Small Ordinaries both broke below key support levels, increasing the odds that the bear has emerged.
I’ll show you the charts in a minute. But what did Gann mean by saying ‘be a bear in a bear market’?
Well, he was a trader. So instead of looking to go ‘long’ (as you do when you expect share prices to rise), he said you should wait for short and sharp rallies and look to go short (as you do when you expect share prices to fall).
If you’re not a trader, the bear market advice is to not buy and hope you’re picking the bottom. Because the bottom is a long way south of where you think it might be.
My feeling is that this bear market could be a run-of-the-mill type affair. That is, you’re likely to see top to bottom declines of somewhere between 20–30%. So far, we’re down around 13% on the ASX 200.
But that’s just my opinion. I really have no idea. And neither does anyone else. The bulls will think a bottom is just around the corner, while for the bears, a decline of any magnitude will never be enough.
As Gann said:
‘To make a success in speculation, you must master yourself. You will find that you are either a natural born bull or a natural born bear, i.e., you either always hope and believe stocks will go higher than they do, or you hope and believe that they will decline lower than they do. Then, you must discount your weak points in trading, and know that a lot of your judgement is not judgement at all, but the result of your natural weakness or inclination for one side of the other.’
My natural inclination is to be bearish. So I counter that by trying to see what is, rather than what I want to see.
That’s why charts are an important analytical tool. They tell you what is, all right. And yesterday, it wasn’t good news for the bulls. The chart below shows the ASX 200 index falling sharply below support, to the lowest level in two years.
Anyone who bought stocks in the last two years is, on average, now underwater. For most investors, two years is the ‘long term’ and if you can’t make a buck in that timeframe, you want to try and cut your losses and get out.
This is the psychological shift that occurs in bear markets. It’s why investors sell rallies as they just want to get out before stocks fall even further.
It’s not only large stocks struggling. The Small Ordinaries index broke below support yesterday too, as you can see in the chart below:
This index is ‘only’ at 14 month lows, so the damage is not as bad. But chart support lies a long way south, so the odds favour further falls here.
The only positive for Aussie stocks is that US markets haven’t cracked lower yet. So there is still a faint glimmer of hope that the US will be able to hold us up and prevent further falls.
As an example of that, have a look at the NASDAQ below:
Still, that isn’t a healthy looking chart structure. In my view, it’s only a matter of time before it breaks lower.
As I’ve said before, the NASDAQ led this bull market. If it is indeed over, then the index will lead the bear market, too.
One other (important) thing to note about this chart: volatility picked up considerably in 2018. Major topping out patterns are characterised by volatility. This process is also referred to as ‘distribution’. That is, it’s a process whereby early bull market investors ‘distribute’ stock to the latecomers. This creates volatility.
When the distribution is complete, stocks tank (support gives way) as there are no buyers to hold prices up.
To me, that is what appears to be happening now. Time will tell, but I think the odds favour a further break lower.
Supporting this view, we have this from the Financial Review:
‘Using powers available to him under competition law, Rod Sims has finally lifted much of the veil of secrecy over the Australian operations of two of the world’s largest advertising platforms — Google and Facebook.
‘For the first time he has been able to reveal that Google and Facebook earned more than half of the country’s $8 billion in digital advertising revenue in 2017.
‘Google earned about $2.5 billion and Facebook about $1.6 billion of the total, according to information disclosed by the two companies as well as data from the Commercial Economic Advisory Service of Australia.’
It’s too late, of course. The tech giants have already decimated the local advertising industry. Sims is head of the Australian Competition and Consumer Commission. He’s belatedly realised they have destroyed any semblance of competition in the market.
But this is the type of stuff that happens at the end of a bull market. So when you put all the pieces of the puzzle together, it’s not hard to see stocks are likely to go much lower in 2019.
It’s time to be a bear…
Editor, The Rum Rebellion