Stocks go down, stocks go up again.
What’s an investor to make of it all…?
As we mentioned yesterday, the Australian stock market had fallen 1.8% on Wednesday. Yesterday it gained 1.1%.
If the Aussie share market keeps doing that on alternate days then the market is in for a steady decline over the coming months. That wouldn’t be a good result.
But as bad as things seem every now and then, the stock market still has a habit of turning up nice surprises to help stocks rebound. Is that sustainable? You’ll have to wait and see…
Finally, a Positive ‘Bolt from the Blue’
Yesterday the stock market was lazily trading along, going nowhere fast. Then suddenly, the latest economic news came out of China. As the Financial Times reported:
‘The world’s second biggest economy said exports in July rose 5.1 per cent year on year, rebounding from a 3.1 per cent drop in June. Imports increased 10.9 per cent, up from a 0.7 per cent fall in June.
‘The numbers are stronger than expected and have raised hopes that activity has revived in what is widely seen as the engine of global growth.’
Before we knew it, the S&P/ASX 200 was up over 60 points. It would be a good day after all.
As always, we try not to get too excited. Even though we’ve set a target of the Aussie index hitting 7,000 points in 2015, we know markets don’t move in straight lines — up or down.
And even though your editor is undoubtedly the most bullish out of everyone in our Albert Park offices, we know that a bolt out of the blue can turn the market upside down…when we least expect it.
Of course the recently big obstacles in the way of a rising market haven’t been bolts from the blue at all. They’ve been repeats of the same old story — central bank meddling.
Saying that, even China’s export and import numbers can’t be completely detached from central bank meddling. It’s a fair argument to say the numbers (if genuine) are only possible because central banks keep printing money and providing artificial stimulus to various economies.
Anyway, for someone as bullish as us, you’d think yesterday afternoon’s stock rally would have had us in raptures. But it didn’t…
Proof it Was a Great Time to Buy Stocks
Although we recommend you invest in dividend-paying stocks in order to collect ongoing reliable income, our favourite end of the market is growth stocks — especially small-cap growth stocks.
Small-cap stocks are great because you only need to invest (OK, punt) a small amount but you still have the potential to make a big return. That’s because small-caps are risky and they tend to be hyper-volatile.
That means they aren’t suitable for all investors.
But there’s something else about small-cap stocks. When the market rallies, small-cap stocks tend to lead the way. That’s because they attract the type of investor who hopes to make a killing from beaten-down, risky stocks.
And because these stocks are so small it only takes relatively few investors to pile in, in order to push the shares higher. In short, when punters are happy to take a risk on small-cap stocks it’s a signal that the rest of the market could be about to take off.
We saw that happen over the past month, as the chart below shows:
Key: Blue line – S&P/ASX 200; Red line – S&P/ASX Emerging Companies Index
Source: Google Finance
As you can see, the Emerging Companies Index gained 9% over the past few weeks compared to 5.3% for the S&P/ASX 200. That chart shows you why we’ve been so excited about getting into small-caps over the past few weeks — telling you to buy stocks while most others told you to sell.
Stocks Pause Before Another Rally
However, yesterday’s market action was different. It wasn’t the small-cap stocks that did the best, it was the blue-chip stocks. That’s enough to give us a brief pause for thought. We ask: have the punters paused too?
It’s possible. The stock market has put in a good run. It’s now hovering around that psychologically important 5,000-point level. So right now it wouldn’t surprise us to see the market hover around this level a bit more.
It would be great if we were wrong and stocks took off in a flash. But for now we see it as a better than 50% chance that Aussie stocks will trade mostly sideways, perhaps for another few weeks.
Be clear: that doesn’t mean you should sell stocks. We don’t see a big crash looming on the horizon. In fact, we say it’s still a good time to buy, especially if the volatility calms down.
Just be aware that you probably won’t see the quick-fire gains that stocks gave you over the past month. But if you were waiting for an opportunity to buy into the market before the next rally, now is the time to do it.
