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The following article was originally published on 27 November 2018.
Before we start, just a reminder that Harry Dent Daily has a new name and M.O. If you missed yesterday’s instalment explaining the changes, you can get up to date here.
Aussie stocks had another poor day yesterday, with the ASX 200 falling 0.8%. Commodities were the main drag on the index, thanks to the ongoing plunge in oil prices and now, the iron ore price as well. BHP and Rio Tinto both fell around 3.5%.
The problem — you should not be surprised to hear — is China. Its Australia-friendly, infrastructure intense growth model looks to be experiencing another slowdown. As the Australian Financial Review reports:
‘China’s steel prices tumbled more than 5 per cent to a five-month low on Monday as persistent worries over weaker demand pushed the sector into a bear market, sparking a selloff in raw materials iron ore and coking coal.
‘As China dials down on anti-smog production curbs this winter, steel supply in the world’s top producer and consumer of the material had been rising while demand is weaker as the cold weather slows the construction sector.
‘The concern among many is consumption may not recover strongly in the spring with China’s economy under pressure from faltering consumer spending and property sales, and with Chinese exports to the United States expected to slide soon as higher US duties start to bite.’
Stocks will get a reprieve today. ASX 200 futures point to a 37-point rally. It looks as though the market is trying to find a bottom here. The question, as always, is this: Is all the bad news priced in at this point?
We know the global economy is slowing. But that doesn’t mean it’s falling off a cliff. Often, sharp adjustments in equity prices merely reflect a reassessment of the pace of global growth. It doesn’t necessarily mean a recession is coming. It might look and feel really bad, but in fact it’s just a normal occurrence.
What hasn’t been normal is the lack of volatility investors enjoyed during the 2016–17 bull market. That lulled us into a false sense of security.
Now having said that, we should point out our view is that global markets will continue to sell-off into 2019 and enter a standard bear market, where overall losses could be somewhere around 30%.
But here’s the thing: the market couldn’t care less about what we think. Our view is a best guess of how things will play out, assessing the pitiful amount of information we can store in our puny brain, while trying not to taint that info with our flawed biases.
The human brain develops biases precisely because it cannot process all the information out there. It needs to take shortcuts, and it does so by coming up with ‘rules of thumb’.
Some rules of thumb are better than others. Some people’s rule of thumb is to be persistently bullish or bearish, regardless of the information they have. Or it’s to be bullish or bearish depending on whether everyone else is bullish or bearish.
Needless to say, this sort of thinking is investor suicide. If you want to make money in the markets, you have to do what the great trader WD Gann said. That is, be bullish in bull markets and bearish in bear markets.
Sounds simple, but it’s not so easy to change your mindset, especially if you follow the herd by reading the same stuff and thinking the same way.
But what do you do when the market is at a potential turning point, like now? It’s neither bullish nor bearish. Our suggestion is to sit on the fence and wait for the market to tell you definitively.
And for that sign, we suggest watching the NASDAQ. It led the bull market higher and will likely take the market down too…if that’s the way it decides to go.
Let’s have a look at the chart…
We’ve drawn two lines to indicate where the support area is. If this support gives way in the weeks or months ahead, then you can be confident that a bear market is upon us.
Right now, probability suggests that the NASDAQ is forming a top. Sharp price falls over the past few months indicate a change of trend is underway. And as you can see, the 50-day moving average recently crossed below the 100-day moving average. This tells you the medium term trend has turned down.
So the odds of new highs happening any time soon are very low. At best, you can hope for some sideways movement for a few months while the market absorbs new information about the pace of global growth, and whether the Fed will keep raising rates.
One other thing to note about the NASDAQ, which supports the bearish case. The US–China trade war has the potential to fundamentally alter the global technology supply chain. We’re exploring this very big issue with our subscribers at Crisis & Opportunity right now. We’re calling it US President Donald Trump’s ‘Undoing Project’.
It has the potential to hurt tech company profits, and this is likely to weigh on the NASDAQ as we head into 2019. Still, we’ll wait for the NASDAQ to tell us whether we are right or wrong. While we think it will eventually break below support, we suspect it has another decent rally in it before it heads lower.
As we touched on yesterday, another market suggesting a global slowdown is upon us, is oil. While it experienced a relief rally overnight, it has simply crashed over the past month.
You’d think that would be good for the east coast gas market, struggling under the weight of higher prices, right? Wrong, as the Australian Financial Review reports:
‘East coast manufacturers are voicing frustration as domestic gas prices fail to follow international LNG prices lower, leaving them paying up to 25 per cent more for spot gas than equivalent export “netbacks” despite the dive in crude oil prices.
‘A combination of cool spring weather in Victoria and an apparent reduction in supplies from the Esso-BHP venture in Bass Strait has pushed gas prices in in the south-east up to about $10 a gigajoule, from $8-$9 a few weeks ago.
‘At the same time the rapid drop in international oil prices, the steepest since the global financial crisis in late 2008, has pushed the LNG “netback” price — the price of Australian LNG less liquefaction and shipping costs — down south of $8/GJ, according to energy market adviser Energy Edge.’
In other words, gas for export is cheaper than gas for domestic use. There is something deeply wrong with the structure of the east coast energy markets. The negligence and lack of strategic planning on both sides of politics that got us here is simply astounding. And we have to vote one of these clowns in again in a few months?
We can hardly wait…
Editor, The Rum Rebellion