Ed Note: I recorded a new market update yesterday, which is now ready to view. I cover a fair bit of ground in this one, so apologies in advance if I appear to sprint through it. Just so you know, I don’t script these updates. I just sit down and start talking. Anyway, check it out. See what you think. If there is anything you’d like me to cover specifically, feel free to leave a comment.
US markets rose again overnight on ‘better-than-expected earnings’ from companies such as Coca-Cola and, apparently, on the news that face-to-face trade talks with China will resume next week.
Why that would be the driving force for anyone to buy stocks is a bit of a head-scratcher. But it just goes to show that when the mood is bullish, it doesn’t really matter what the reason is.
It’s simply a matter of ‘stocks rose today on <insert random reason>’…and everyone goes about their business.
But the fact remains that stocks are pricing in ongoing good times, while bond markets are pricing in anything but.
My guess is that the view of the stock market will prevail for the time being, but the bond market’s opinion will dominate within a few months.
But that’s just a guess. Until the market confirms that view, you have to be cautiously bullish. Sitting in cash and waiting for a crash is not a strategy.
It’s a fear-based reaction borne out of not being able to rationalise why stocks are going up in an environment of weak economic growth.
Here’s a tip: The stock market rarely makes sense to the rational thinker. There are a few reasons for this. The main one is that the stock market is always looking ahead. Yet we, as investors, usually only see or read about what has already happened.
It is only when the future comes to the present that we see what ‘the market’ saw months in advance.
I’ll give you a good example. Earlier this year, there was nothing but bearish commentary about the housing market. It was a question of how far prices would fall, not whether the market had reached bottom.
But looking through the charts of various housing related stocks made me realise that the market was in fact forming a bottom.
The banks were a big giveaway. Specifically, the performance of the Commonwealth Bank [ASX:CBA] gave a hint that the worst was over for housing late last year.
Have a look at the chart below. Note how CBA made a double bottom in October last year?
Then, it rallied and put in a higher low in December, at the same time as the broader market plunged to new lows.
When you get a divergence like this from a major stock, it’s worth taking notice. CBA diverged from the market at a time when panic was sending most stocks to new lows.
The market was telling you something. It was saying that the worst was over for housing. While the reality on the ground was much different, and house prices were still falling, that had all been priced in.
I used this argument in March to recommend another housing related stock to subscribers of my investment advisory, Crisis & Opportunity. The stock was Harvey Norman Holdings Ltd [ASX:HVN].
At the time I knew the recommendation would be an unpopular one. Most successful recommendations are. That’s because sentiment towards housing was so bad. It was all over the media. There was real fear about housing prices bringing the economy down.
Listen to the Share Price…
But the market was telling you otherwise. If you were willing to listen and put your fears and opinions to one side, the market was giving you an opportunity.
As you can see in the chart below, my subscribers got into HVN around $3.80. At the time, it was trading on a juicy forecast dividend yield of more than 6%.
This week, HVN broke out to a fresh 12-month high, which is generally a bullish sign. Subscribers are up 20% in around four months. Not bad for a solid blue chip.
The point to note here is that while investing in this environment is scary, there are good opportunities to be found. You just need a process to ensure you’re not firing random shots and hoping something will hit.
A process gives you confidence and a plan. It was this process that recently helped me pick four speculative gold plays to take advantage of the gold bull market.
If you’d like to find out what they are, or learn more about the Crisis & Opportunity stock picking process, click here.
Editor, The Rum Rebellion
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