Market Prices Show a Shift in Sentiment Everywhere

Aussie stocks took a beating yesterday.

The reason?

Apparently, rising inflation.

Although the 10-year Aussie government bond yield is still below its February peak. So the bond market isn’t so sure about this explanation.

To be more specific, the market had a panic about the effect of inflationary pressures on commodity producers in particular.

The ASX 200 Resources Index sank nearly 3.3%.

The ASX 200 Energy Index fell 2.8%, as did the ASX Gold Index.

Meanwhile, the broader ASX 200 fell 1.9%, so clearly resources led the falls.

To put things into context, though, resources have had a very strong run of late. Especially the big iron ore miners that dominate the indices.

A solid correction here shouldn’t come as too much of a surprise. It’s the same for companies exposed to other commodities that have had a strong run lately. Things like copper, nickel and lithium…as well as stocks exposed to the green energy revolution.

From the Financial Review:

Companies have unveiled rosy updates for the March quarter, bolstering investor expectations for a strong second-half reporting season to mirror the six months to the end of December, which beat analyst expectations.

However, anxiety is emerging that the burst in earnings growth, with bumper demand across sectors from retail to commodities and banks, may begin to dissipate.

“There are a number of sectors where a strong demand environment has led to strong earnings and the question is whether that is sustainable or whether we are at peak earnings?” Ms Hudson said.

Whatever reason you want to give, the simple explanation is that the market has had a tremendous run over the past year. Obviously, government and central bank largesse have been the primary drivers of that.

But speculative enthusiasm only has a certain amount of energy. At some point, prices succumb to investor fatigue and look for fundamentals to sustain them. Sentiment is beginning to shift.

And in many cases, prices have run well ahead of earnings. Now the worry is that the current batch of stimulus-driven earnings won’t be sustained.

What makes this all the more interesting is that this is happening with the ASX 200 bumping up against the all-time highs reached before the pandemic hit.

Have a look at the chart below…


Source: Optuma

[Click to open in a new window]

On 10 May, the index rallied in an attempt to make a new high. But selling immediately followed. Since then, you’ve seen the selling increase.

In my view, the market will more than likely make new all-time highs this year. But we’re probably due for a gut-wrenching correction before that happens. The market has a way of destroying the speculative fervor and easy gain mentality before moving higher.

It’s the same thing playing out in the crypto space.

From The Australian:

Bitcoin plunged by as much as 30 per cent after China signalled a new crackdown on the cryptocurrency and Tesla head Elon Musk sent mixed signals about his car company’s use of the unit.

The virtual currency fell to almost $US30,000 — less than half the record value it reached last month — before climbing back over $US33,000. It was still above its level at the start of the year.

Trading in cryptocurrencies has been banned in China since 2019 to prevent money laundering, as leaders try to stop people from shifting cash overseas. The country had been home to around 90 per cent of the global trade in the sector.

On Wednesday, authorities said cryptocurrencies would not be allowed in transactions and warned investors against speculative trading in them, despite the country powering most of the world’s mining.’

Greed is giving way to fear.

Bitcoin is still in the price discovery phase. So no one really knows where a ‘fundamental’ price level should be. Which is why you’re seeing such wild price swings.

And many punters don’t care about trying to understand what the fundamentals are. That is, what the underlying structure and technology of bitcoin is that gives it its value.

And it’s hardly a surprise that China isn’t a fan. Bitcoin is a massive threat. China’s internal credit growth and yuan money supply is massive. To keep it in the country, they have to have capital controls that prevent money escaping.

Bitcoin provides an anonymous and easy way to do this. No wonder it’s banned. That the market panicked over China reiterating a bank that is already in place tells you how far sentiment has come in a matter of a few months.

While it doesn’t show up on this chart, overnight the price of bitcoin plunged to US$30,000, all the way down to where I’ve inserted the green support line.

That looks like a capitulation low to me. At the very least, bitcoin should bounce from here to clear the oversold condition.


Source: Optuma

[Click to open in a new window]

But the chart doesn’t look great in the shorter term. Bitcoin is here to stay. But after a 50% plunge, it will take the market a while to stabilise and move higher again.

In the meantime, gold may be the better bet to protect against fiat currency.

If you’re interested in following developments in the crypto markets and the demise of the monetary system, check out this new service I’m involved in. We discuss all things related to this ‘new money’ system, detailing its growth, and what it means for your future wealth.

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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.

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