Following on from yesterday’s comment about stimulus and easy headlines, here’s the opening sentence from today’s ‘Before the Bell’ article in the Financial Review:
‘Australian shares seen up at the open, as Wall Street heads to a slightly higher close as investors continue to bet on the potential for a stimulus deal.’
Ahhh…stimulus. Where would we be without it?
This comes hot on the heels of confirmation that the US government fiscal deficit for the year to 30 September was a massive US$3.1 trillion.
The market already knew that. And it knows that it has already washed through the system. Which is why it’s desperate for more.
Whether that happens before the election though is another matter. The Democrats won’t want to give Trump a win by agreeing to limited measures. And Trump doesn’t want an off the charts spending package as proposed by the Democrats.
Still, the market is in the mood to wish for impossible things.
The market is bullish, despite correction
The market is also still in a bullish mood, despite last month’s sharp correction. It’s looking on the bright side, swanning around with a glass half full and enjoying the sun.
But let’s take a step back and look at the charts. Specifically, let’s take a look at our old mate the NASDAQ, the leader of this carefree bull market. As you can see, last month’s correction was merely a speed bump, a dip to be bought:
Maybe it is. Maybe fortune will favour the brave again.
But these chart patterns are often (not always, but often) the sign of a top forming. That is, you get a near parabolic move higher followed by a sharp sell-off. Then, all the bulls (and latecomers to the party) think the lower prices are a gift and so they push the index higher again.
But as this point, the rebound rally splutters. The charts form a ‘lower high’. The bulls get nervous. From here, the key will be whether the previous low (in this case, the September low) holds, or whether it’s taken out with panic selling.
If that happens, you can almost be sure a deeper correction, over many months, will play out.
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The NASDAQ is in topping out mode
There are no certainties in markets. Ever. You have to keep all options open and be willing to change your mind. As the stoic philosopher Seneca said (long before Keynes):
‘It is folly to say, “What I have said must remain fixed.” There is no disgrace in having our opinions change with the circumstances.’
Right now, I’m running with the view that the NASDAQ is in topping out mode. I just think the probability of prices going much higher from here is lower than the probability of prices running out of steam and a deeper correction playing out.
If true, it has implications for our own ‘tech stocks’, or more realistically, consumer credit plays like Afterpay Ltd [ASX:APT]. Its recent share price performance is close to that of the NASDAQ, as you can see below.
Will it surge to new highs and keep the dream alive for thousands of day traders? Or will this rally run out of steam imminently?
My money is on the speculative engine starting to splutter.
I’m not saying that just because wildly overvalued stocks make little sense to me. I say it because the tide is turning for these speculative plays.
All the things that pushed prices higher since March are starting to diminish.
Let’s start with the Fed. While its QE program will continue, it’s increasingly being sidelined in favour of fiscal policy. That’s because, despite all its talk of targeting inflation and goosing the money supply, it’s played its hand.
The Fed is the emperor with no clothes. Its ‘money printing’ program is nothing of the sort. It’s an asset-swapping program that, like three card monte, beguiles the viewer for a short time. But after a while, the players catch on.
That’s why the market is watching Trump and the ‘stimulus’ (as in fiscal) game so closely. But, as I said earlier, the hope for further fiscal measures is done until the election at least.
What about Australia?
The good news is our market is cheaper and not as tech-heavy as the US. There is good long-term value to be had in many Aussie stocks. The latest budget has been well received.
But there is a reason the government had to throw another $200 billion at the economy (following a $500 billion injection through the worst of the shutdown). That’s because there has been a huge amount of (government-inflicted) damage that will take many years to recover from.
The budget will help. But it’s not a panacea. The economy needs to open up, borders need to open up, travel needs to resume. Did you know Australia, NZ and India are the only three countries in the world not allowing their citizens to travel internationally?
The nanny state here knows no bounds.
And don’t tell me the government is trying to protect us. They are trying to win votes by playing the fear card and convincing you that it’s all for your own good.
As I said yesterday, for the economy to truly recover and deliver strong, sustainable growth, the government needs to get out of the way.
Editor, The Rum Rebellion