It's been an unpleasant period: This is what you need to know:
Clearly the US equity markets bottomed last night (Thursday night, Australian time, June 16). It was a textbook intraday reversal from key long-term support. It was an exact repeat of what we saw in Australia during Thursday’s session. There was very little resistance to the US recovery (up 300 points in 40 minutes), exactly what happened in Australia. All leveraged investors have been stopped out. All hedge funds have liquidated risk in equities. The knife has stuck in the valuation support floor. You have seen the absolute lows of this correction. Buy quality and buy it hard while there’s still any scrip around. Corporate action will resume (ie, Asciano and Brambles).
What will surprise you all is how little stock is actually around in leading Australian companies as the market stabilises and starts to tentatively recover. Pension funds aren’t sellers, high net worth families aren’t sellers, and the forced sellers have finished. There will be a lack of selling around into the recovery particularly as broker principal trading books have basically been shut down too. The market could easily recover 300 points, led by mega caps, with very little resistance. BHP’s result next Wednesday is crucial to the recovery.
Credit markets will open for business again soon, and volatility will start decreasing. Credit traders have lost their minds. Triple A rated corporate paper should attract a bid. As the VIXX retreats confidence will come back into leaders and people will buy the companies that report the strongest earnings this reporting season.
I started my career on the floor of the Sydney Futures Exchange as a trader for Ord Minnett. I know a capitulation and market bottom when I see one. They are all same and they involve irrational emotional trading. Yesterday in Australia and last night in New York was a classic capitulation market bottom and key reversal. You will not get another chance to buy leading Australian stocks at the ridiculous prices we saw at 1.45pm yesterday. Get ready for a recovery in quality.
The most oversold/shorted stocks in our market remain BHP, Oxiana, Telstra, the Big Four banks, Suncorp, Macquarie Bank and Bab & Brown. The risk of a huge short squeeze in Macquarie Bank shares is very real. That thing is primed for a very large bounce. The world is short quality low-risk financials and has sold commodity stocks as risk. That will prove a HUGE medium-term mistake..
In 15 years at the coalface of Australian equities trading I have never seen a day like Thursday. Sure, I’ve seen a few big down days and a few big up days, but to see major Australian companies have 6–10% intra-day trading ranges is truly amazing, let alone the benchmark index seeing a 5% trading range.
Whatever really happened, the trading knife stuck in the ground on Thursday and started vibrating. I suspect I was one of very few people at their desk over lunchtime. Most people had gone out for a sandwich or to a corporate results presentation with the index down 150 points. Down 150 points is a bad day, but in the scheme of things lately it’s not such a big deal.
Then the fun started. We were nibbling away buying blue chip stocks for Australian fund managers and the market suddenly started being offered across the board. Not just offered, but offered down aggressively. I checked at my news screens and I couldn’t spot any story that would have spooked the market. I checked all my regional equity market screens and nothing was noticeable either. I checked the futures market but it was shut for maintenance!
Quite frankly, over the next 20 minutes the ASX200 went into ‘free fall’ mode”. Bids were being hit at any level and I remember looking at my watch list at about 1.45pm and seeing all four major banks and BHP down more than 6%. That is something you simply don’t see and at its worst the index was down more than 300 points, again something you simply don’t see.
It was almost like I was having the ultimate ‘bulls nightmare’. I was hoping to be woken up, but it was real and it was happening right in front of me.
I have often written about ‘capitulation’ in these notes. However, Thursday's price action in Australian equities will be looked back upon by following generations as a textbook example of a capitulation. Stop-losses, forced selling, margin calls, program selling and exasperation were everywhere. It was a textbook capitulation by leveraged longs who simply couldn’t take any more downside pain.
Great Australian companies were being dumped indiscriminately as though they were junk bonds, and thankfully a few people saw the opportunity in the situation and attempted to buy a few genuine bargains. As the bargain hunters moved in it became apparent that the panic sellers had pretty much sold and there wasn’t any decent scale stock for sale on the way back up. Then started a 240-point rally off the 1.45pm lows that would have to be the largest intra-day bounce off its lows the ASX200 has ever seen.
Market terrorists
In a world of unprecedented access to leverage, equity markets are capable of new and sometimes scary volatility. It is very easy to convince yourself that you are missing some much larger story that the sellers know and you don’t. I honestly thought at one stage on Thursday that a terrorist attack must have occurred but the only ‘market terrorists’ were the grossly over-leveraged and black box-based program sellers.
Black box investing is all good, and good luck to those who use it, but one thing a black box can’t forecast is ‘emotion’ and ‘irrational behaviour’. The other clear factor is market impact is always underestimated when everyone is trying to do the same thing.
However, the good news is that prices of leading Australian companies were driven to such low risk-adjusted levels that investors did see that what was occurring was irrational. The other bit of good news for long-term investors is that just about all leveraged investors have sold. Turnover Thursday was $12 billion, double the daily average, and market bottoms/capitulations are always associated with huge volume.
That was the bottom, and you will now see institutional investors sort through the trading damage and pick up some bargains now the knife has stuck and started vibrating.
From now on focus only on the ASX20, get some genuine risk-adjusted bargains on board, and then look outside the ASX20 once you’ve done that.
Yes, there will not be any instant rebound to 6400 index points, but I reckon the rebound over the next few weeks will surprise the super-bears and those betting on wholesale global financial market contagion. It will be led by mega caps.
It is always much smarter not to catch the falling knife. The best investors let the knife stick and then pick it up while it is still vibrating. If that means you buy leading stocks 5% off their lows that is fine, at least you didn’t buy them 20% too early.
The reason you have cash is to take advantage of these situations. People always make the mistake of thinking ‘isn’t it great I have some cash’ when they should be spending it.
I am happy to be on the record telling you the ASX200 index bottomed at 1.45pm yesterday and that will be the absolute bottom for the next 18 months.
At least someone is putting their neck out.
ASX Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
(20min delay)