US markets had an ugly session overnight with the Dow dropping 1.92%, S&P500 down 2.37% to 3237 and the Nasdaq lower by 3% to 10,633. Markets were driven lower by Tesla's 10% fall and Apple and Amazon 4% fall.
But a better discerning market participant ought to know that no two stock market bourses are or ought to be the same, although direction may be parallel. And I will share this observation below so you can understand why our ASX would fair better than the US markets in this very short term.
The reality is that the US markets are just experiencing a retracement from an overextended rally, hence a correction.
The reference point is July 15, this is when the big rally within the rally began and now in hindsight we know that we reached the peak on Sept 2 just before Septimber. From July 15 to Sept 2. the S&P500 climbed 11% and at overnight close, it almost lost all that 11% and just 10pts above its July 15 close. What about Nasdaq? Over the same period, Nasdaq climbed 14.3% and at overnight close, it is sitting just 0.8% above July 15 close, again the overextendedness of the July 15-Sept 2 rally has now been erased.
But what did our ASX200 XJO fair in comparison? We did not peak in Sept 2, we had three peaks around 6160 , first in 3rd week of July, second 19 Aug and third 25 Aug and since then, we had been in a decline. XJO's move from July 15 to those peaks only measured 1.78% or roughly 16% of the S&P500 performance AND the XJO is now already -2.1% from July 15, so even before today's ASX price action, we are already below July 15 while both the S&P500 and Nasdaq are just returning to their July 15 levels.
Why then should ASX perform better than the US markets? We suffered the last 2 months with barely anything to show for other than sideways movement because we had the Victorian shutdown and concerns over our stoush with China. But Victorian virus cases are turning the corner now while Europe and US cases are ramping up. Boris Johnson is emulating Victorian lockdown strategy and US media praised Andrew's stringent approach that is workable. That's one. Second, we can expect a more favourable fiscal and monetary policy environment coming up with huge planned stimulus and possibly a rate cut, while in the US, the stimulus stalemate continues and possibly wont be resolved until after the election. This is just the short term comparison, not suggesting that we will outperform the US market. But it explains the short term disconnect and why we should not read too much into the US market slide having this perspective.
Now let's look at how overextended the FAANGMT stocks have been. Again looking at Jul 15-Sep 2 timeframe, Tesla gained a remarkable 61% and even with the 10% overnight slide, Tesla has just retraced 24% from that Sep 2 peak and still 27% higher than its July 15 close. Same story with Apple. From July 15 to Sept 2 it gained 37% and since retraced 20% from peak but still 9.62% higher than its July 15 close. Microsoft is however already below its July 15 close while Facebook is not far off at just under 4% above it. These monsters of tech will continue to do well but their valuation has far exceeded their fundamentals at least in the short to medium term and hence a reversion to the mean is all too well expected to occur at some point and it has now come home to roost.
But not all tech stocks are the same. I opined that we should be sectoral focus and focus on those sectors that can and will benefit from what the future holds. Longer duration growth stocks, yes. The new COVID economy stocks , and how the new ways of working can significantly positively influence their growth trajectory from here. Buying the future makes perfect sense rather than legacy businesses struggling under challenging economic environment, hence the two speed market I spoke about.
A perfect example is Zoom Video. Overnight Zoom hit $500 while FAANGMT capitulated. Zoom zoomed from $256 on July 15 to close at $457 on Sept 2 , a 78.5% rise but since then, it continued to rise another 9.4% to hit all time high. That's the new COVID economy stock poster child for you.
In contrast, lets look at the banks XLF which I suggested to steer clear of. From July 15 to Sep 2 peak, it only moved 1.35% higher and has since (Sept 2) dropped 3.9%. Goldman Sachs even peaked on July 15 and been dropping since, now 14% lower than its July 15 close. Citigroup which peaked around early Aug has even plunged 19.3% from its July 15 close.
Clear message: Be in the Right Sector and Be in the Right Stock in the Right Sector
The right sector faces tailwinds ahead, the wrong sector faces headwinds today and going forwards. The new economy stocks and gold juniors and EV beneficiary stocks are what I described as right sector, the legacy and cyclicals are the wrong sectors. The right stocks have the right fundamentals for their valuation and better still undervalued for their prospective fundamentals. Westpac woes with $1.3B fine underscores the poor risk-reward with banks.
Lets compare Gold now. We should weather the storm better with our Aussie gold miners. Here's why
First, as you know the US Gold price has been dragged lower by the short term strength of the US dollar. Our Aussie is now at 70.8c. While US$ Gold has retraced 4.80% since Monday, AUD Gold has only retraced 1.46%.
Second, holders of local gold stocks in particular producers know that they have had it tough since the big drop from $2000. In contrast to the GDX, our XGD has long underperformed in relative terms. While GDX rose 15.2% from July 15 to Aug 6 high, our XGD only scaled 7.7% higher in the corresponding period. GDX closed just 2.7% below July 15 close based on overnight close. But before our trading this morning, XGD is already 3.55% below its July 15 close. In other words, our Aussie miners did not go as high as their US/intl counterparts during the peak and has already suffered more since then. And this , despite A$Gold (-2.2%) doing better than US$ Gold (-5.6%) between the same timeframe of July 15-present.
Third, Gold juniors have been outperforming Gold producers (refer to my previous posts) and will likely continue to do so.
Overnight, POTUS declares that the Supreme Court would probably decide on the fate of the election outcome. And why the present 4:4 stalemate would not let to a decider. What does that imply? He will contest the result even if he loses. This election uncertainty clearly is having a bearing on the US markets even before it happens because developments do not look favourable.
In any case, as I mentioned yesterday, we are likely to be out of this quagmire within a week, so I anticipate US markets would rebound from 3200 if not 3000.
And if we are going to sell when we see a sea of red only to buy back when we see green, that is not the way to make money.
The more pertinent question is, does you emperor stock has any clothes beneath the robes? Is the run-up in your stock overextended for its fundamentals?
As Zoom clearly showed, pick the right stock in the right sector now that has considerable potential upside ahead, there is little to fear of the fall in the indices. And be clear, with Tesla and Apple still have possibly another 10% downside from here, sure the indices still have room to fall.
No tech stocks are the same, no bourses are the same. Let us not throw the baby with the bathwater out. We will be more discerning.
