Australia - Watch for a Rally - Then Jump Ship
Updated
Let's start with the broader picture first
I understand the market looks horrific at press time, but the first thing that you must know about markets is this, nothing every goes in one direction forever, no matter how bad it seems.
For context here are the three major US stock crashes.
2008 Crash
2000 Tech wreck
1929 Great Depression
The second thing that you must know is that a market will TYPICALLY, not always, but typically will retrace 50% of the first wave before continuing lower, as seen in the above charts.
In the most recent price action, this would entail a bounce to around 5400-5900, this is a prime opportunity to lighten exposure and prepare for another leg lower. Now, we may not get a bounce to the 50% fib level, but a move to the 38.2% is highly likely, at this point i would begin to lighten exposure and begin to buy shorting instruments, i.e. Puts.
Now, where do i see the potential low?
If the prior crashes throughout history are any gauge, then a top to bottom move of 50% is very likely, with the 1929 crash closer to 90%, i expect at worst we could see a middle ground, call it around 70%. This would be heavily dependent on Covid19 being far worse than governments are expecting, and a extended period of lock-down, which at press time, must not be discounted.
That being said, the first targets are a "typical" 50% move from the peak, as you can see, this would erase ALL gains from the past 20 years, taking the index back to levels first reached in 2001.
The third thing you must know about markets is that they go up in the long-term, emphasis on LONG-TERM.
After the 2007 peak, it took over 4,300 DAYS to retread those levels.
Do you have 12 years to wait?
Bear in mind also, this index is not inflation adjusted, if one inflation adjusts the index we never made new highs, in other words, it has been over 13 years and we are yet to make new highs.
What about Real Estate?
I have long maintained the Australian real estate market is a bubble, ready to burst, with valuations in some areas exceeding over 10:1 income to Value ratios (IVR), this was inevitable and the bubble appears to be finally bursting, so no, your equity in your house will not save you.
In fact, real estate priced in gold, is breaking out of a decade long slumber, what this means is that your home may gain nominal value, as governments feebly attempt to print enough money to cover the cracks, but your home will in reality be hemorrhaging real purchasing power.
Welcome to the word of relative values, where your house can both go up AND down in value, simultaneously.
In short, Australia has a weak economy, i have not even touched on the consumers and households overburdened with debt, the over reliance on the services industry as a primary source of GDP or the super fragile banking system, which by the way, have a huge number of "interest only loans" switching to principle and interest, over the next 18 months.
Hmmm... wonder how the general households will deal with those.
-TradingEdge
Interest only loans:
https://www.rba.gov.au/publications/smp/2018/may/box-c-the-expiry-of-interest-only-loan-terms.html
I understand the market looks horrific at press time, but the first thing that you must know about markets is this, nothing every goes in one direction forever, no matter how bad it seems.
For context here are the three major US stock crashes.
2008 Crash
2000 Tech wreck
1929 Great Depression
The second thing that you must know is that a market will TYPICALLY, not always, but typically will retrace 50% of the first wave before continuing lower, as seen in the above charts.
In the most recent price action, this would entail a bounce to around 5400-5900, this is a prime opportunity to lighten exposure and prepare for another leg lower. Now, we may not get a bounce to the 50% fib level, but a move to the 38.2% is highly likely, at this point i would begin to lighten exposure and begin to buy shorting instruments, i.e. Puts.
Now, where do i see the potential low?
If the prior crashes throughout history are any gauge, then a top to bottom move of 50% is very likely, with the 1929 crash closer to 90%, i expect at worst we could see a middle ground, call it around 70%. This would be heavily dependent on Covid19 being far worse than governments are expecting, and a extended period of lock-down, which at press time, must not be discounted.
That being said, the first targets are a "typical" 50% move from the peak, as you can see, this would erase ALL gains from the past 20 years, taking the index back to levels first reached in 2001.
The third thing you must know about markets is that they go up in the long-term, emphasis on LONG-TERM.
After the 2007 peak, it took over 4,300 DAYS to retread those levels.
Do you have 12 years to wait?
Bear in mind also, this index is not inflation adjusted, if one inflation adjusts the index we never made new highs, in other words, it has been over 13 years and we are yet to make new highs.
What about Real Estate?
I have long maintained the Australian real estate market is a bubble, ready to burst, with valuations in some areas exceeding over 10:1 income to Value ratios (IVR), this was inevitable and the bubble appears to be finally bursting, so no, your equity in your house will not save you.
In fact, real estate priced in gold, is breaking out of a decade long slumber, what this means is that your home may gain nominal value, as governments feebly attempt to print enough money to cover the cracks, but your home will in reality be hemorrhaging real purchasing power.
Welcome to the word of relative values, where your house can both go up AND down in value, simultaneously.
In short, Australia has a weak economy, i have not even touched on the consumers and households overburdened with debt, the over reliance on the services industry as a primary source of GDP or the super fragile banking system, which by the way, have a huge number of "interest only loans" switching to principle and interest, over the next 18 months.
Hmmm... wonder how the general households will deal with those.
-TradingEdge
Interest only loans:
https://www.rba.gov.au/publications/smp/2018/may/box-c-the-expiry-of-interest-only-loan-terms.html
Note
We are currently sitting just below the outlined area, with the move up to the 5,400 mark, i would begin to lighten equity exposure, with the view that we could still have a move into the highlighted box. But we could also begin the next leg down, at least to the prior low.
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