Emotion Shows Up in the Charts

Dear Reader,

Yesterday I wrote about the power of positive sentiment.

While the coronavirus threat is real, the market is not overly concerned.

Yesterday, company reporting season got underway. This is where (most) companies report their half-yearly results to the ASX. The 2020 financial year is already halfway through!

Cochlear Ltd [ASX:COH] lowered full year guidance on the back of coronavirus fears. Suncorp Group Ltd [ASX:SUN] reported a weaker-than-expected result. However, it took the heat off its own failings by talking up the risks of climate change.

Beach Energy Ltd [ASX:BPT] cut full year guidance, after reporting a 14% year-on-year profit decline.

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Macquarie Group Ltd [ASX:MQG] disappointed the market. It reaffirmed previous guidance saying full year profits would be down on last year.

On the other side of the coin, toll road operator Transurban Group [ASX:TCL] reported a 11% increase in profit. Australia’s population Ponzi scheme works very well for this company. That is, we keep shoving more people into our cities (to promote headline economic growth) forcing them into long commutes that they have to pay for!

Challenger Ltd [ASX:CGF] upgraded full year guidance and the day before, JB Hi-Fi Ltd [ASX:JBH] reported a strong result.

Given the mixed results and the threat of China grinding to a halt, you’d think the market would be a little nervous.

No chance. The ASX had a strong day yesterday. And it should have another good session today. Iron ore and commodities in general rallied overnight as the market bet the virus won’t do too much damage.

The market is smarter than us

Maybe the market is right. After all, it’s smarter than you or me. Most of the time, that is.

But it’s fair to say that it’s erring on the side of recklessness, not caution, here.

Which is hardly surprising, I suppose. This is exactly what central banks want. What do they expect when they set nominal interest rates below the rate of inflation, producing negative real rates?


It breeds risk taking. And lots of it. When the rewards come from taking that risk, it promotes it even more.

This infects the mindset of the market. It becomes the narrative. That is, ‘everyone knows that everyone knows’ that stocks won’t go down much, because central banks will support prices.

So what are you doing on the sidelines, you fool!

An out of control virus sweeping through the world’s second largest economy, slowing the movement of people and goods?

Yeah, nah, it’s all good!

The authorities have got this.

Which brings me to another point I want to talk about…

My mate Vern Gowdie has a new report out. It’s bearish, you’ll be shocked to hear. (For those new to The Rum Rebellion, Vern is a well-known bearish voice in The Rum Rebellion.)

I’ve mentioned this report to you a few times over the past few weeks. This has caused some confusion. If I’m ‘promoting’ Vern’s views, it must mean I agree with him.

 ‘Emotion’ does show up in the charts

The thing to understand (and we don’t always make it clear) is that we’re a publishing company. We publish ideas that we think investors might find useful.

We don’t have a ‘house’ view. I don’t have the same view as Vern. While I agree with him that stocks are overvalued and dangerous, I have no idea when the overvaluation ends.

My underlying philosophy is that I am ignorant and know very little. Therefore, what I think doesn’t really matter. And because I know that I don’t know, I am happy to consider different viewpoints.

Like Vern’s. If nothing else, his research is sound. But I suspect Vern might be feeling a bit like Isaac Newton after he (reportedly) blew himself up punting on the South Sea Bubble.

Newton supposedly said:

I can calculate the movement of stars, but not the madness of men.’

That’s the tricky thing about stock markets. They are a reflection of fundamentals like economic growth, interest rates, earnings…and investor emotion.

It’s pretty easy to understand the fundamentals. The emotion part…not so much.

But the ‘emotion’ does show up in the charts.

For example, check out this chart of Tesla Inc [NASDAQ:TSLA]. The past few months price action is pretty much all emotion.

This is what a chart divorced of fundamentals looks like…

The Rum Rebellion

Source: Optuma

[Click to open in a new window]

Anyone buying here is likely to lose money in the years to come. I can say that despite knowing little about Tesla, or, indeed, about anything else.

What I do know is that buying into a parabolic move is a very low probability play, beyond a few months.

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Buying into a parabolic stock move requires supreme ignorance (not of the philosophical kind) and unbridled optimism. By that I mean optimism of the perennial stupidity of your fellow man (yes, man) to buy your shares at a higher price down the track.

Tesla is an obvious example of a stock price full of emotion. That rally also contains the fear of the short sellers, which is probably why it looks so dramatic. Short sellers lose when a share price rises, and to get out they must buy back the shares they were ‘short’ of.

It’s never easy being so certain of something. Whenever your conviction is high, and if it comes with a lack of humility, the market will teach you a lesson about it.

The good news is that you can learn the lesson and become a better person and investor, or you can blame something else and continue making the same mistakes.

The choice to make, as always, is yours.


Greg Canavan,
Editor, The Rum Rebellion

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates.

Greg will help The Rum Rebellion readers block out all the nonsense and encourage personal responsibility…both in the financial and political world.

Learn more about Greg Canavan's Investment Advisory Service.

The Rum Rebellion