The telling question no one asked

Monday, 4 November 2019
Adelaide, Australia
By Bernd Struben

  • When the herd is fearful…
  • The elusive recession
  • Then there’s ‘the Donald’
  • Managing Risk

An odd thing happened over the weekend.

Actually, the odd thing is what didn’t happen.

Let me explain.

Over the weekend (Aussie time) US markets rallied. Both the S&P 500 and NASDAQ closed at new record highs on Friday.

We’ll get to the impetus behind the rally shortly. Along with why the bull should have at least another year to run stocks to ever higher highs. Though not in a straight line, of course.

But first, the odd thing.

My wife and I attended a friend’s 40th birthday party in the Barossa Valley on Saturday. She and her husband own a boutique winery, so the catering — seafood paella — was excellent. And the selection of wines was enough to get your head spinning…even before sampling them.

A lot of the guests were involved in the wine industry. Logically I was interested in their take on the wines. Oaky, subtle hint of tannins, dry, salty…

I mostly nodded along with their evaluations, adding the occasional, ‘Mm, this one’s really good.’

We tend to stick to what we know best, after all. Which is why I expected the usual questions when people learn what I do for a living. On Saturday I was sure that would be about surging stock prices…and the best opportunities to get aboard the gravy train.

That was certainly the case back in the spring of 2017. When bitcoin began its meteoric rise from less than US$4,000 in September, everyone wanted in. And as it surged onwards towards US$20,000 in December the mania didn’t let up. ‘How high will it go?’ topped the list of questions I fielded even in the final days before the bubble popped.

But this weekend, caution prevailed. Rather than seeing the new record highs in US markets as a reason to buy, most saw it as a reason to sell. Markets can’t keep marching higher forever, was the general mantra.

That’s true, of course. But it’s generally only when the masses are highly exuberant and everyone wants in — as with bitcoin in 2017 — that you should really start to worry.

On the flip side, when markets are marching higher in the face of investor jitters and doubts, today’s record highs could become tomorrow’s profitable entry points.

We’ll get back to that, after a look at the markets…


Over the weekend, the Dow Jones Industrial Average closed up 301.13 points, or 1.11%.

The S&P 500 closed up 29.35 points, or 0.97%. As mentioned above, that marks another new record for the index, taking out last Wednesday’s highwater mark.

The tech heavy NASDAQ also notched a new record high, closing up 1.13%.

In Europe the Euro Stoxx 50 index closed up 19.33 points, or 0.54%. Meanwhile, the FTSE 100 gained 0.75% and Germany’s DAX closed up 94.26 points, or 0.73%.

In Asian markets Japan’s Nikkei 225 is closed for the Culture Day holiday. China’s CSI 300 is up 0.76%.

In Australia, the S&P/ASX 200 is up 5.71 points, or 0.09%, weighed down by heavy losses from the banks.

West Texas Intermediate crude oil is US$56.20 per barrel. Brent crude is US$61.69 per barrel.

Turning to gold, the yellow metal is trading for US$1,512.74 (AU$2,186.99) per troy ounce. Silver is US$18.11 (AU$26.18) per troy ounce.

One bitcoin is worth US$9,172.28.

And the Aussie dollar continues to inch (centimetre?) higher. It’s worth 69.17 US cents.

When the herd is fearful…

So US markets are at record highs, and the Aussie market is eyeing its own new records. But instead of FOMO (fear of missing out) many investors are beset with FONGO (fear of not getting out).

That’s seeing people turning to cash and bonds even as stocks climb higher.

First the bonds. As colleague Ryan Dinse pointed out in Money Morning earlier today:

Most of the money is flowing into bonds right now, rather than stocks. Nervous-Nellie investors are moving into the safety of bonds at record levels. Even though bonds are paying a pittance.

Speaking of paying a pittance, there’s good old cash in the bank.

Last month I highlighted some of the results of the UBS Global Family Office Report, done in conjunction with Campden Research.

Campden estimates that single and multi-family offices around the globe manage some US$5.9 trillion (AU$8.8 trillion). And the report concludes that, ‘About 42 per cent of family offices around the world are raising cash reserves.’

These family office find themselves in good company. The Australian Financial Review (AFR) informs us that, ‘Warren Buffett’s Berkshire Hathaway builds up record cash pile.’

The size of that cash pile?

US$128 billion (AU$185 billion).

Jittery investors upping their cash holdings is not the classic recipe for an imminent bursting stock market bubble.

Having said that, markets will almost certainly endure some downward corrections as they head higher over the next year. But with the world’s wealthiest investors — and humble viticulturists alike — waiting to ‘buy the dip’ those corrections are likely to be modest and short lived.

The elusive recession

The biggest fear I hear expressed and see plastered across the mainstream financial news is that a recession is looming. And it will knock the stuffing out of share prices.

Now a worldwide recession is coming…eventually. A depression even. One that will rock global stock and real estate markets like none before. But there are good reasons to believe the impending downturn remains a distant smudge on the horizon.

Interest rate cuts have likely worked most of their ‘magic’. But the world’s leading central banks have plenty of fire power left for a few more rounds of quantitative easing (QE) to keep their economies and the markets chugging along.

And while growth rates in Australia and the US are slowing, the latest jobs figures out of the US hardly point to a meltdown.

The US Bureau of Labor Statistics reported the creation of 128,000 new jobs in October. That’s 38,000 more than economists’ consensus forecast, as polled by Econoday. The Bureau also revised up the number of new jobs created in September and August.

Then there’s the latest round of quarterly company earnings reports. We were told to prepare for the worst. But the worst never eventuated.

In fact, as noted by FactSet, 80% of companies reported better than expected earnings. Profits and sales figures also beat expectations.

Then there’s ‘the Donald’

Few topics are as divisive as the presidency of Donald Trump.

But whatever side of the divide you fall on, there’s no denying that Trump revels in his role as the most powerful man in the world. One with the ability to physically wipe his enemies from the face of the world…or cripple their economies with a single directive.

Not to mention the impact his actions — and tweets — have on the markets.

I say this because Trump will pull no punches in his effort to secure four more years in the White House. The US presidential election takes place one year from yesterday. And Trump knows his success hinges on the strong economic and Wall Street performance he’s long taken credit for.

If he can keep the markets ticking higher, he’ll likely remain in office until January 2025. (Unless you believe the Democrats have a snowflakes’ chance in Darwin of pulling off their impeachment dreams.)

From Bloomberg:

An enduring U.S. expansion puts President Donald Trump on course to win re-election in 2020, according to economic models with a track record of predicting who wins the White House.

The forecasts from Yale University professor Ray Fair, Oxford Economics Ltd. and Moody’s Analytics Inc. are based on Trump being boosted at the ballot box by steady economic growth, an historically tight labor market and limited inflation.

Of all the rabbits Trump can still pull from his hat, the ongoing trade war with China is his key play. Which is why it’s looking like the sparring nations will sign-off on phase one — out of three — of a new trade agreement this month.

From Bloomberg:

Commerce Secretary Wilbur Ross expressed optimism the U.S. would reach a “Phase One” trade deal with China this month and said licenses would be coming “very shortly” for American companies to sell components to Huawei Technologies Co.

President Donald Trump on Sunday told reporters at the White House that a trade agreement, if one is completed, would be signed somewhere in the U.S. “First of all I want to get the deal,” he said…

The Chinese side also sent out positive vibes. As the AFR reports:

Beijing’s top trade negotiator and Vice-Premier, Liu He, “reached consensus on principles” during talks with US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin, China’s Commerce Ministry said on the weekend.

We’ve seen US–China trade agreements evaporate at this stage before. But with Xi Jinping facing growing pressure at home over rioting in Hong Kong and slowing growth on the mainland — and Trump’s lead role on the global stage at stake — I expect this time will be different.

I also expect Trump to tease out more promising news and potentially sign phase two of the trade agreement in the final months leading up to the election.

Already, for example, it appears that Trump may forgo the threatened tariffs on imported Japanese and European cars.

Speaking to Bloomberg television, US Commerce Secretary Wilbur Ross said:

We’ve had very good conversations with our European friends, with our Japanese friends, with our Korean friends, and those are the major auto producing sectors...’

Trump’s a showman, after all. He knows attention spans are short. So he’ll do what he can to offer a steady sprinkle of good news through 3 November 2020. Enough to keep the stock bull running. And enough to secure his victory.

After that…all bets are off.

The art of risk management

Below market veteran Murray Dawes share’s his latest trading tips and insights.

In his premium trading service, Alpha Wave Trader, Murray uses his proprietary ‘slingshot method’ to focus on extracting huge profits from stocks while minimising risk.

Today he highlights the importance of his risk management strategy. A strategy that saw him exit a recent short recommendation when it went against him without incurring any losses.

You can scroll down and click on the image below to watch Murray’s latest video now.

You can also get the full scoop on Alpha Wave Trader by clicking here.


Managing Risk

[Knowing when to hedge a portfolio can be difficult. Click on the picture to watch a live example of how Murray managed a hedge trade in the E-mini S&P 500 futures for members of his Alpha Wave Trader service.]

Managing a portfolio of stocks can be a tricky business. There is always the fear of watching profits disappear in a market meltdown.

There is the option of hedging your portfolio but that throws up a whole bunch of other questions that need answering.

When should you put the hedge on? When do you take it off? How should you manage the hedge?

In today’s ‘Week Ahead’ update, I thought it would be a good idea to show you a live example of how I’ve managed the risk in the Alpha Wave Trader portfolio.

We’ve been buying stocks during the rally this year and currently have 13 open positions. But I have been concerned over the past few months that the US market might tip over again.

The trend remains up, so I’m not interested in selling out of our positions that are in the money. But I saw enough signs of potential weakness that I was willing to put a short position on to hedge the portfolio.

This is where technical analysis comes in.

Markets have a habit of mean reversion whether caught in a range or trending. Understanding how mean reversion develops gives you a powerful tool.

By making calculations off the most recent wave up in the uptrend, I was able to set up a trade that got short the E-mini S&P 500 futures at 2980 and took half profit at 2915.

With 65 points profit in the kitty on half the original position, it meant that our breakeven price on the whole trade was 65 points above our original entry price or 3045. That price was above the all-time high, at the time.

Once we had taken part profit the possible outcomes for the trade were to breakeven if prices hit 3045 or make money if prices sold off further.

In the event prices have broken out to new all-time highs and we were stopped out of the hedge last week but remain 100% long the 13 stocks in the portfolio…

The hedge that we had on would have lessened any damage to the portfolio if a downtrend developed, but it didn’t end up costing us a cent. The key reason why it worked out so well was due to the strict rules I follow for managing risk.

I always want to take some profit as soon as I can, and I take profit near the point of control (the midpoint of a wave or range).

An important consideration is where the breakeven stop-loss will be once we have taken part profit. I like the stop-loss to be above major resistance if short (betting prices will fall) or below major support if going long (buying). That means I will be happy to stop out of the position because we have been proven wrong.

I give you a detailed explanation of the exact calculations that I made to plan out the trade in the video above.


Murray Dawes,
Editor, Alpha Wave Trader