Over the last few weeks one of my constant themes has been the “X” factor as it always comes into play after major run ups in the markets. What that factor might eventually be is always difficult to predict. Whilst the markets over the long term have an underlying economic logic – which is commonly called – “fundamentals” – markets over run – on the way up and on the way down. This is sentiment. And because the markets had over shot in recent weeks, guilt over this has set in and it then takes little to spook fearful investors who have maybe got on board this rally towards the end.
The changing of tides – literally and metaphorically – can be confusing at the very least. At worst the change of tides can be also fatal. They are not to be taken for granted. Some stocks will hold up well – others will continue south. This is an ideal time to cull the portfolio!
The Australian market can be such an accurate reader of other markets – especially US markets. As our market is virtually a day ahead of the major overseas markets we have to not only contend with local issues but there is also an element of second guessing the US markets. I am impressed at how accurately the Australian markets often reads what might happen in the forthcoming hours on Wall Street. But last Wednesday it got it so so wrong when a fall on the DOW was all so imminent, our market climbed a courageous 27 points only to be surprised by a 109 point fall on the DOW that night.
This is the confusion to which I refer and it is often caused by late entrants into the markets. These are more often than not retail traders who are concerned they have missed the rally – buy in – only to see their capital suddenly at risk and quickly bail out. Wednesday was an up day on the Australian market – yes you guessed it – on low volume. The day after we saw large volume on a down day – yes these are the signs of a market in retreat.
I have written “ad nausea” about market retracement on markets that are rising. The same principle can be applied to markets that are falling – they also retrace – that is after a series of down days they also have a breather and climb back up a little before they head further south.
At this stage we cannot say that either the Australian or US markets have actually gone into a short term decline yet, so I will hold over elaborating on that point until we have a little more clarity which should come over the next few days.
Enjoy the ride.