Why You Need to Prepare for a Short-Term Correction

I’m back in Melbourne for a few days to finalise the house move. A few months ago, my wife and I decided to move to Wollongong to be closer to family. The move has been a successful one. The kids love it. The beaches, the lifestyle…everything is less crowded and easier.

We’re not the only ones doing it. When I booked, the removalist told me they’re inundated with calls from people moving to NSW and especially QLD. Is it people moving back home? Starting a new life?

Whatever the reasons, it will be interesting to see the net migration figures in a few months’ time. Anecdotally, Dan Andrews is driving plenty of people out of the state. I certainly don’t know anyone keen on moving here.

One thing’s for sure, COVID killed St Kilda. I went out for a few beers last night to say goodbye to a long-time friend. We met at the Village Belle. It’s at the end of the St Kilda Mall, where the 96 tram terminates.

The place was dead. The mall and the surrounding streets were lifeless. After a beautiful sunny day in early Summer, St Kilda is usually packed.

Not last night. Big Mouth, the iconic bar on a prime corner position, is now closed, joining a number of other shops in the area.

Despite this, we still managed to pay $28 for two pints of beer. I certainly won’t miss Melbourne pub prices. They’re outrageous.

Nor will I miss the persistent face mask wearing by a compliant population. But I won’t go there today…

Punters have moved on pot stocks again

Instead, let’s have a look at markets. The bulls are running rampant at the moment. Seemingly everything is catching a bid.

The punters have moved on pot stocks again recently. We’re talking insane gains. For example, my mate over at Money Morning, Ryan Dinse, got subscribers to his trading service on board Creso Pharma Ltd [ASX:CPH] recently. They were sitting on 1,000% gains at one point, in less than a month!

That’s Ryan’s premium service. But his entry-level service is smashing it too. If you want to check out his latest picks in relation to the green energy revolution, go here.

The amount of money pouring into markets is extraordinary. Stock markets around the world are breaking out to new all-time highs. Australia is probably not too far behind. But perhaps we’ll see a correction first?

Have a look at the chart below. Since the end of October, it’s been a one-way street for investors. Resources AND financials are working, which is great for the broader index.

Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

The strong rally over the past six weeks is clearly bullish. But in the short term, the momentum and hype has been a little too extreme.

Discover five ASX-listed firms that have been beaten down during the crisis…with the potential to rally strongly as the market recovers. Click here to learn more.

I expect the market to go higher. But not before it dishes out some punishment first.

It’s the same in the US. The S&P 500 is stretched. Having said that, it’s spent a lot of time in the second half of the year in a ‘stretched’ position. The index did pull back 0.8% overnight, perhaps this is the start of the elastic band snapping back?

Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

It’s the same with the NASDAQ. It’s stretched in the short term too. But overnight, this index fell nearly 2%, so maybe the elastic band is snapping back here too.

Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

Strangely though, defensive assets didn’t catch a bid in US trade. Usually when stocks fall, things like bonds and gold rise. But overnight, US 10-year Treasury yields increased a few basis points to 0.942% (meaning bond prices dipped) and the gold price fell US$32 an ounce, or 1.7% to US$1,842 an ounce.

Prepare for a correction…

I’ve marked the overnight move in green. As you can see, after gold broke down from its consolidation pattern, it tried to rally back into that range. Last night’s rejection of that move suggests that the gold correction has further to run.

From here, you really want to see gold make a ‘higher low’, somewhere above US$1,770 an ounce. If it can’t do that, it’s probably heading below US$1,700. Let’s see what happens…

Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

The one defensive asset that did catch a bid overnight was the US dollar. It wasn’t much of a bid though. The US Dollar Index only rallied 0.15%.

You can’t even see that in the longer-term chart below.

But what I do want you to note is that fact that the US dollar has been in a bull market against other fiat currencies since 2008. That’s when the monetary system as we used to know it broke.

Ever since, the greenback has been appreciating against the world’s major paper currencies. I’ve marked a series of higher lows on the chart. Are we in the process of forming another one now?

Who knows? But it’s worth keeping an eye on. Because if the dollar starts to rise from here it will suggest the inflation narrative that is currently doing the rounds is running out of puff. That will put pressure on stock markets and especially the more speculative end of the market.

Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

As I mentioned earlier, while markets look very bullish at the moment, you need to be prepared for a short-term correction.


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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.

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