THINKING OUT LOUD

Current Market Views – April 18, 2018

by Rob Zdravevski

I wanted to write an update and follow up to my comments from my note, dated March 23, 2018.

In that circular, I wrote that I expected major equity indices to move lower (and they did), the same indices will re-test their January 2018 lows (and they did); that the UK’s FTSE 100 and Spain’s IBEX Index will trough first (which they did so 1 week earlier than the S&P 500), Oil to move higher (it has risen 11%) and I felt that the AUD could hold the 0.7640 level and it has since done that and climbed back to 0.7760, which is a current resistance level.

I called for a further lower leg in the Shanghai Composite. This index has fallen 4.7% since then, whilst Western markets have bounced.

BHP shares did hold the $28 and now are 7% higher, trading at $30.

There are times in this business when you’re “seeing the ball well”.
Our clients portfolios……

Specifically, over the actual calendar month of March 2018, our client portfolios “hung tough” and in fact many posted gains of 1%-3% for the month whilst indices lost value.

I’m happy with the limited risk being taken within our portfolios at this current stage and we are poised to deploy capital should we find any bargains.
From those late March lows….

the S&P 500 has advanced 4.8%, the Dow Jones Index rose 5.3%, the Nikkei, DAX and FTSE have climbed 7%, while the ASX 200 Index is unchanged as is the Australian Dollar.

Incidentally, over the same time, Bitcoin has fallen 9%.
And now I see…..the current market as a “dead cat bounce” within a multi-month bearish trend.

Amongst various indicators I use, the non-confirmation of any new bullish trend in the U.S. (KBW) Banks and Transportation Indices helps me say that equity indices are in a weak to moderate short-term uptrend and soon I expect markets to re-test the January & March 2018 lows again, to create a “triple-bottom”.

Should those support levels hold, markets should then move higher again.

For the patient, longer term investor, we are prepared to snap up some bargains, should they present themselves.

If we use the S&P 500 Index as an example, the upcoming decline and subsequent resumption of the bull market should catch those fair-weathered traders out. They are ones who have being calling for a crash over the past 6 months and then there are those who have not been invested over the past 8 years.

Remember, markets go to where they can do the most damage.

It is another moment to heighten your awareness and take advantage of others who panic and overreact.
Other current views include……..

the AUD is trending higher in the short-term and the longer term bullish view is building too. This also coincides with bullishness in the CRB (commodities) Index.

Assisting this thesis, the US Dollar Index is resuming its downward trend.

I’m bullish on the European indices, especially the U.K. and Italy. The latter being the 3rd largest country in the eurozone and one of its economic laggards as the country figures a way to form government after their March 4th elections.

Oil is still moving higher, as are commodity prices.

And for those interested Bitcoin watchers, it looks like staging a short-term rally from its current $8,070 to the $9,200 level and perhaps $11,300, all the while it is in a longer term downward trend.
Some reminders and observations……

In amongst my research and analysis of various stocks, I place great importance of anticipating to buy into opportunities that are created as a result of news headlines, whether it’s Trump, U.S. – China trade talks or North Korea, to name a few.

Remember that Volatility is the price you pay for long term capital gains.

If there is no volatility, then the “rate of change” that occurs in the price of an asset would be quite benign. An example of this is the cash interest rate in your bank account.

Lately, I’ve been hearing from retail investors that they prefer being an “income investor”. I’m concerned that their search for “yield” is lulling them into a sort of silliness and conformity that this is a safer option or strategy.

I have seen many a time where investors have bought a stock which has a wonderfull dividend yield of let’s say 6%, but paid too much for the shares. In other words, the company was expensively valued. Only to see the shares fall 15% or 20% over the next year.

It doesn’t matter if you get a 6% dividend when you soon after lose 20% of your capital.

Keep in mind, that good companies who produce consistent and sustainable cashflow often produce an attractive return a combination of  capital gains and a reasonable distribution of dividends.

Until next time,
Yours sincerely,
Rob

 

Rob Zdravevski
Principal, Karri Asset Advisors

Global Investment Ideas
Equities Portfolio Management & Advice

m 0438 921 403
rob@karriasset.com.au  w www.karriasset.com.au

Disclaimer