Key strategies for tumbling stock markets

Wednesday, 21 November 2018
Melbourne, Australia
By Bernd Struben

  • The worst of the lot
  • Keep your eye on this opportunity

Do you remember December 2016?

In some ways it feels like only yesterday. In other ways it’s clearly almost two years gone by.

My daughter, who turns five tomorrow, was only three then. These two years represent 40% of her young life. And probably 90% of the life she actually recalls. A long two years, in other words.

Having just turned 50 myself, the past two years are only about 4% of my not-so-young and fairly-well-recalled life. One of the reasons every new year seems to slip by a little faster than the last.

But we’re not here for a stroll down memory lane. I bring up December 2016 for a reason.

On 23 December 2016 the investment mood was buoyant.

Only a few people — save subscribers to Sam Volkering’s Revolutionary Tech Investor — had invested in bitcoin yet. At the time bitcoin was worth about US$800. And it was about to go on a phenomenal 12 month rise to over US$19,500.

But you didn’t need to be invested in bitcoin then to see great gains in your portfolio.

Most Aussie stocks were on a tear.

The ASX 200 hit 5,627 points on 23 December 2016. That was a gain of 8.6% since 4 November that year.

Even a simple index tracking ETF, like the SPDR S&P/ASX 200 Fund [ASX:STW], would have helped you usher in a merry Christmas.

That was then.

Today, 23 months later, the ASX 200 is once again at 5,627 points. Or it was when I began penning today’s Port Phillip Insider.

That means if you’d invested in an index tracking fund like STW 23 months ago, you would have made exactly zero dollars today. Minus management costs.

There’s no single reason for the sell-off in most Aussie stocks.

But the big falls in the US markets are a major factor. The ASX tends to follow in the footsteps of the Dow, S&P 500 and NASDAQ. And all three US indices have seen heavy selling.

Global tech powerhouse Apple Inc. [NASDAQ:AAPL], for example, fell 4.8% in yesterday’s trading.

No one can say how much further markets will fall. The best we can do is make educated guesses.

As for Goldman Sachs, they’re recommending investors begin to hedge their bets by increasing their cash holdings.

As The Australian Financial Review reports:

“Mixed-asset investors should maintain equity exposure but lift cash allocations,” Goldman strategists led by David Kostin wrote in a November 19 report. “Cash will represent a competitive asset class to stocks for the first time in many years.”

The call reflects the impact of Federal Reserve interest-rate hikes that have sent yields on money-market funds well over 2 per cent – surpassing the pace of inflation.’

I can almost hear our own wealth preservation expert, Vern Gowdie, applauding all the way over on the Gold Coast.

Vern has long cautioned that he sees today’s stock markets as ‘high-risk low-return’ traps. And he’s long recommended taking shelter in cash.

There’s a lot more to Vern’s strategy to survive a full blown market crash with your assets intact. You can find all the details by clicking here.

Or, if you’re the more adventurous type with a stomach for some risk, I suggest you check out Kris Sayce’s Crash Market Investor.

Kris isn’t content to sit on the sidelines and wait for the storm to blow over. Instead he hunts down stocks intended to deliver big gains during any market meltdown. Discover how here.

With all of that said, I reckon it’s a good thing tomorrow is Thanksgiving Day. With US markets closed for the holiday, perhaps the ASX can find its own path.

Now let’s look at the latest rout in the markets.


Overnight, the Dow Jones Industrial Average closed down 551.80 points, or 2.21%.

The S&P 500 fell 48.84 points, or 1.82%.

In Europe the Euro Stoxx 50 index finished down 44.26 points, or 1.40%. Meanwhile, the FTSE 100 fell 0.76%, and Germany’s DAX closed down 178.13 points, or 1.58%.

In Asian markets, Japan’s Nikkei 225 is down 118.91 points, or 0.55%. China’s CSI 300 is up .09%.

In Australia, the S&P/ASX 200 is down 31.68 points, or 0.56%.

On the commodities markets, West Texas Intermediate crude oil is US$53.57 per barrel. Brent crude is US$62.53 per barrel.

That’s a 5.7% plunge in WTI since I wrote to you yesterday.

Turning to gold, the yellow metal is trading for US$1,220.48 (AU$1,692.06) per troy ounce. Silver is US$14.30 (AU$19.83) per troy ounce.

One bitcoin is worth US$4,312.56. That’s another 10.3% fall over that past 24 hours for the world’s biggest crypto. Is this the beginning of the end for bitcoin…or a great buying opportunity?

Find out here.

The Aussie dollar is worth 72.13 US cents.

The worst of the lot

To uncover why the ASX 200 is trading at the same level as 23 months ago, you need only look at the past three months.

As you can see in the chart below, the Aussie benchmark index is down 10.6% in that time. That makes it the worst in the region. And it highlights the importance of investing some of your money outside of Aussie stocks.

chart image

Source: Bloomberg
Click to enlarge

One of the major factors pulling down share prices is the ongoing trade dispute between China and the US.

Australia’s close trade relations with China is part of the reason the Aussie market has been particularly hard hit.

That remains an ongoing cause for concern. But it also presents a ray of hope.

As I’ve been writing for months, I expect Donald Trump and Xi Jinping will reach a new agreement before Trump has to follow through with his next round of higher and more expansive tariffs. Those tariffs are scheduled to take effect in January 2019.

I also expect the two men will announce major progress towards a deal following their meeting at the G20 Summit in Buenos Aires on 1 December. If so, this should see a healthy lift in global markets. Particularly the Chinese and Aussie markets.

Steven Daghlian, a market analyst at Commonwealth Bank of Australia’s securities unit agrees…if somewhat belatedly.

From Bloomberg:

Australia’s stock market, the worst performer in the Asia-Pacific region in the past three months, needs signs of a thaw in the U.S.-China trade spat to spur a year-end rally…

‘[Daghlian] says a positive outcome of the meeting between U.S. President Donald Trump and his Chinese counterpart Xi Jinping at the Group of 20 summit starting later this month could be the catalyst needed for December gains.

Another drag on global stock markets are rising interest rates. And once again, the US is at the root of this.

As you can see below, the US Fed has been steadily raising rates since late 2016.

chart image

Source: Trading Economics
Click to enlarge

Now RBA governor Philip Lowe has indicated Australia’s central bank won’t be following suit any time soon. But in the big scope of things, the impact of the RBA’s cash rate is dwarfed by anything the Fed does.

And the Fed continues to forecast additional rate rises to keep signs of rising inflation in the US in check.

Does that mean we can expect more hard times ahead for the ASX?

Not necessarily.

Here, once more, our unlikely saviour is none other than ‘the Donald’.

Trump has been unhappy with the Fed’s rate hikes all year. Now he’s upping his rhetoric.

From Bloomberg:

“I’d like to see the Fed with a lower interest rate,” Trump told reporters in Washington. “We have much more of a Fed problem than we do with anyone else.”

The Fed held borrowing costs steady at its meeting earlier this month but investors expect it to raise rates in December, which would mark the fourth hike since Trump-appointed Jerome Powell became chairman in February.

Whether you love him, hate him, or are completely indifferent, you shouldn’t underestimate the power of Trump.

He demanded lower oil prices…and now crude is at one year lows.

Now he’s demanding lower interest rates.

While I can’t see the Fed actually cutting rates in December, they may well back off their next planned rate rise and hold steady in the face of Hurricane Trump.

If that happens alongside signals that the trade war is nearing its end, December 2018 could still see investors celebrating a very merry Christmas.

Now read on for the latest guest essay from the Billionaire’s Trader.

Today he casts his eye onto the energy sector. And on what you should look for in an energy stock before you pull the trigger…

Keep Your Eye on This Opportunity
By The Billionaire’s Trader

Another big drop overnight for the US indices. And a big drop for the Aussie market too.

With everything that’s happening…the whip-sawing of markets in different directions, it’s more important than ever that you have someone in your corner helping you through it.

So, let’s spend today diving into an analysis of a stock on my watchlist. This is a great example of how I spot good opportunities.

Just to be clear. This is absolutely NOT a recommendation.

This is a case study in how trends shift from down to up and where to look for opportunities during a shift in trend.

The stock we’re using for our analysis today is Senex Energy Ltd [ASX:SXY].

It’s an up and coming oil and gas producer with exposure to the gas shortage on the east coast of Australia. It has plans to increase production from the current 0.84mmboe (million barrels of oil equivalent) to an annual production rate of 4mmboe by the end of the 2021 financial year. It has a current market capitalisation of around $600 million.

Now, I won’t go into a serious fundamental appraisal of their prospects. Because right now, there isn’t a buy signal. But the chart is starting to get interesting.

There are signs that the Australian government is going mad, and threatening to cap prices on electricity. And no doubt, you can rely on the Labor opposition to step up the rhetoric of blaming companies for the mess that the government has created in the energy markets.

So, there are real regulatory risks overhanging the sector. If the government starts capping prices, we’ll see less investment, which will lead to less supply in the future. Ultimately, that will result in higher prices. But that doesn’t faze me too much. It could end up creating the opportunity that I’m about to discuss.

To explain, let’s look at the chart. It depicts why I think there may be a great opportunity coming in this stock down the track. Remember: this is NOT a recommendation today.

Not all trading is short-term

chart image

Source: CQG Integrated Client
Click to enlarge

The steps necessary to look for a great opportunity are pretty simple — once you understand what to look for.

This particular set up is quite rare because it takes so long to form. In fact, it has taken five years of trading to bring us to this point in Senex Energy.

Senex had a long-term downtrend in place from 2012 to late 2015. You can see the major waves that I have traced out for you on the chart above. The most recent down-wave in the downtrend had a high of 47 cents in April 2015. 

Theoretically, as long as prices remained below that level, the long-term downtrend was in place.

On the other hand, an uptrend developed from the lows reached in late 2015. You can see the waves traced out on the chart. It’s interesting to note that in this uptrend, we have already seen three retracements into the buy zone of the previous up-wave before turning and rallying again.

Prices managed to bust up through the high made in April 2015 in August and September this year. So we now have our ‘hint’ that the long-term downtrend could be over. But remember, we don’t want to buy that breakout above the ‘hint’.

As you can see, the price had a dramatic fall after the breakout occurred due to falling oil prices, government interference and a poorly received quarterly report.

That means we now need to wait for a move back into the buy zone of the most recent up-wave in the uptrend (the green rectangle in the chart). Then we wait for a confirmation of a buy pivot in the weekly or monthly charts.

There is an added level of rules that I apply after all of that has occurred. But, I can’t reveal that to you here. In order to get that info, you had to be in the ‘Speed Trading’ Masterclass. If you were part of that, check your email inbox today for further information on the special project I’ve just launched with Port Phillip Publishing.

Anyway, back to Senex. The buy zone range is from 27 cents to 31 cents, with the current price at 41.5 cents. That means the buy range is 25% below the current price. That’s quite far away, so we may never get the opportunity to buy in the perfect spot.

But that’s fine. I’m willing to wait and see what happens from here. Mostly due to the overall bearish moves that are happening in equity markets and the oil price. You should never trade a stock just because you ‘like’ it. Trade it when the chart tells you that it’s the time to buy.

Right now, it’s not the time to buy. Patience is a good thing in trading.

Of course, deciding where you will be proven wrong is harder to determine. It depends on your risk preferences. A short-term trader who wants to leverage up, and is willing to be proven wrong quickly, could dump the position if it closed below the most recent wave low in the current uptrend. That would be below 23 cents.

A more conservative trader or investor might use the technical rules to enter the stock, but then hold on through thick and thin from that point on, due to their belief in the fundamental story. Or they could choose a stop loss level that’s below a very strong support level. 

The buy zone of the whole wave up since the lows in 2015 would be such a support level. That buy zone is between 16.5 cents and 22 cents. So a stop loss of 15 cents, for example, would allow for a lot of volatility, but also force you out of the stock if the major support level didn’t hold.

Be clear: trying to trade these smaller cap stocks with tiny stop losses is a recipe for disaster. You’ll get whipped out of your position over and over again.

The idea is to look for superb entry points to give you maximum leverage to any gains, and choose a stop loss level that is below major support zones within the trend. Waiting for confirmation from the buy and sell pivots is so important because it will keep you out of bad trades where the price never manages to turn back around.

One final note. The other day, I mentioned a short-term support zone in the S&P/ASX 200 Share Price Index (SPI) Futures. I thought I should follow it up now that prices have plummeted into that area.

The levels I gave as an area of support were 5,632 to 5,677. I also said if prices plunged through the recent low of 5588 then all bets were off, because there is a chance prices plummet for hundreds of points below there.

The low this morning was 5,592 or just four points above the 5,588 low. As always, we need to wait for a buy pivot from this area before I can start looking for a trading opportunity. But I’ll stick to the view I gave a few days ago, that we could see a rally from this zone, which would place short-selling traders under pressure.

The big picture though remains very bearish. US markets have a monthly sell pivot in place, and until we see a monthly buy pivot, my expectations are for lower prices over the coming months.

Until next time,
The Billionaire’s Trader

Before you log off, don’t forget to check out the latest in ultra-political correctness from The Australian Tribune:

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