Strap Yourself in…

Monday, 15 June 2020
Melbourne, Australia
By Greg Canavan

PUBLISHER’S NOTE: Imagine a stock trading system that could do much of the thinking for you…prompt you to buy and sell at the right time…and could help lead you to success, whether the market bounds up to new highs, or crashes down hard. This is the closest thing we’ve ever seen to it…


Selling returned to the market last week.

I know. Crazy right?

The Aussie market fell 4.8% on Thursday and Friday, although it’s expected to bounce today following a decent session in the US on Friday.

If you’ve been tuning into The Insider, you’ll know this is something Murray Dawes and I have been keeping an eye out for.

A turn in the market is hardly surprising given the extent of the rally over the past few months. But the more important question is: Whether this is just the start of a renewed sell-off, or whether it’s merely a pause in what is (in the US at least) one of the fastest, liquidity-fuelled rallies in history?

Let’s see if we can put some of the pieces of the puzzle together…

Firstly, I want to show you a chart of the Small Ordinaries Index. As I mentioned in the video chat with Murray on 4 June, the small-cap stocks were at risk of bumping up against resistance and turning back down.

You can see in the chart below that is exactly what happened…

The Insider

Source: Optuma

The small-caps, which have strongly outperformed the bigger stocks in the rally since the March low, hit resistance and turned back down during last Tuesday’s trade.

The big decline for the sector came on Friday, with a fall of 3%, compared to the ASX 200’s 1.9% decline.

This suggests the ‘risk on’ nature of the recent rally is faltering. Momentum traders that are here for a good time, not a long time, want out of the smaller, speculative stocks quickly.

While that in itself isn’t a sign that the rally is over, it is an indication of a shift in risk sentiment.

Why is that important?

Well, this rally doesn’t have a strong foundation. As I’ve written previously, it’s largely built on liquidity, which is what, in turn, helps drive bullish short-term sentiment.

Alan Kohler, in a column in the Weekend Australian, comes to the same conclusion:

At nearly 22 times, the global MSCI price/earnings ratio is the highest it has been in 20 years and well above the pre-GFC peak. The US forward PE is 25 times, about the same as the 2000 bubble peak. The Australian ASX 200 PE is 19.5, just a couple of points below the September 1987 peak.

OK, those are just stats — what’s behind them? What’s fundamentally different this time?

Kohler’s answer is ‘liquidity’.

The gush of liquidity from the Federal Reserve is not only colossal, it’s quick — quicker even than the 2008 response by 200 days.

The growth in M2 money supply has been the strongest since records began in 1960. Something similar is happening everywhere, but not as epic as the US.

And on Wednesday the Fed more or less pledged to keep US interest rates at zero until the end of 2022, another two years!

Following the Fed’s meeting last week though, US stocks crashed around 6%.

What does this say about liquidity?

Just because the Fed ‘pumps liquidity into the market’ doesn’t automatically mean prices will go up. Liquidity depends on confidence. Without it, there is no ‘liquidity’.

Instead, it’s just cash, sitting fearfully in bank accounts.

Liquidity refers to the constant movement of that cash. It moves through asset prices, bidding prices up (if the mood is bullish) with each pass.

So has the mood turned fearful?

It certainly looks that way. Although it’s early days and the price action this week will give you more of an idea of whether sentiment is indeed turning bearish again.

One thing looks certain though. And that is the fact that volatility is likely to be with us for some time. By volatility I don’t just mean falling prices. I’m referring to big moves in both directions.

When the market is so full of this ‘liquidity’, the fundamentals (earnings, valuations, etc) take a back seat. It’s all about investor emotion.

The uncertainty about the health of the economy and the huge amount of debt propping things up will no doubt contribute to this volatility.

On this topic, I came across a fascinating chart, courtesy of a Twitter account I follow called @macrocharts.

It pointed out that 2020 is currently the sixth most volatile year in history, with 61 days of at least 1% daily market moves. Of all the volatile years in the study, the average was 129 days of 1% daily fluctuations.  

The Insider

Source: Twitter

In other words, the craziness of 2020 isn’t over yet. There’s still a long way to go.

This type of volatility can cause a lot of stress if you’re managing your superannuation account or general investment portfolio.

If you don’t have some sort of system in place, the volatility will have a large emotional and financial impact. That’s especially the case if you’re relatively new to the DIY investing game.

When it comes to using a ‘system’, I am a big believer in using the market to guide you. Personal opinions are a dime-a-dozen. But the market’s verdict is the only one that counts.

This is why I’m such a big fan of our Algo Trend Trader service. It’s on the ‘must read’ list for me, every Monday. It simply gives you the market’s verdict in 10 key indices and stocks. There is no ‘I think’. Just the facts.

In a highly uncertain and volatile market, a service like this is hugely valuable. Our readers think so too. Here’s a letter from an Algo Trend Trader subscriber that featured in this morning’s update:

Hi Tom and Woody. This is the service needed for these times. Reason — it’s entirely flexible no matter what is going on. And I can use the width of the yellow band to decide even when I think volatility is too great to trade at all. I have no doubt that there is complex research, maths and grunt of experience behind the graphs. But the way it’s presented is GOLD (good choice of band colour). With no long term market trend for buy and hold, no interest on cash holdings, (doesn’t mean this service replaces cash reserve holdings which should be carrying extra weight now anyway), this service allows me to take some calculated risk to try produce some gains with a portion of my investable funds. Thanks team. Enjoying the videos.

If you’re interested in potentially making money out of volatility in 2020, instead of having volatility make money out of you, then click here.

Continue scrolling for this week’s ‘Week Ahead’ update from Murray Dawes.


The Selling Returns
By Murray Dawes


[Murray has been predicting that equities would meet stiff selling pressure and it appears he was right after a massive sell-off last week. Click on the picture above to see where he thinks markets are heading next.]

Markets made a sharp U-turn last week after testing the top of the sell zone of the crash. My last few ‘Week Ahead’ updates have been focused on warning traders about the high probability that selling would return soon.

The Dow Jones fell 7% in one session last Thursday. That’s a big move and probably a sign of things to come. In the overnight (to US traders) market today, the E-mini S&P 500 futures have opened weak and are currently down 40 points or over 1% at 2,995.

Prices have gapped open on Monday below the 200-day moving average, which sits at 3,011. That’s not a good sign.

My short-term charts say that there should be good support around current prices so I wouldn’t be surprised to see another rally higher. But I will be using that rally to enter into short positions rather than buying.

In the video above I give you a detailed look at the current situation in the E-mini S&P 500 futures and the ASX 200. Both charts are looking bearish on the monthly charts, but there is still upside momentum on the weekly charts.

So we may still see more volatility in the short term as the upside momentum fights to maintain supremacy. But I think last week’s intense selling pressure will ultimately reassert itself and we should see prices head towards 2,800 in the E-mini S&P 500 futures.

If 2,800 can’t hold I have targets to the buy zone of the wave down in the crash. That range is 2,320–2,480. A long way down.


Murray Dawes,
Editor, Pivot Trader