Over the past year, the Australian share market has had displayed more volatility than the streets of Ferguson, Missouri.
And although the S&P/ASX 200 is up 9.9% during that time, for most of this year the market has traded in a sideways channel.
It’s important to know that.
For all the talk about crashes and crises the market has only closed higher than yesterday’s close on one day this year. That was on 31 July.
That was the day before the market began to crash because…heck, do you know what, we don’t even remember. Do you remember?
Free Reports:
We bet you don’t. And that’s our point about all these fake crises — they amount to nothing. If you can’t remember the reason barely three weeks later, then you know it wasn’t a dot-com bust, subprime meltdown or September 11 type disaster.
Of course, that’s history. More important is what will happen next? Here’s our take…
The market has been going sideways.
But the market never goes sideways forever.
Eventually it will break out of a sideways trend and move higher…or lower.
It’s always one or the other. It can’t be both.
Since the creation of the S&P/ASX 200 in 2000, there have been relatively few periods of a sustained sideways trend.
In most cases, the market forms a clear upward or downward trend. But sometimes it forms a sideways trend like the one the market is going through today.
So, how have the sideways trends developed in the past?
Looking back to 2000, there are five periods of a sustained sideways trends on the Australian stock market. Here are the periods, followed by an explanation of what happened when the sideways trend broke:
July 2000–June 2002: After this stocks fell
May 2006–September 2006: After this stocks climbed
October 2009–July 2011: After this stocks fell
August 2011–August 2012: After this stocks climbed
February 2014–August 2014: ?
If you’re the superstitious sort, you could say that after this period ends stocks will fall.
And that could happen. But we’ll make one point about the instances when the market fell after a sideways move — in both cases, roughly one year later, the market rebounded and moved a lot higher than the previous sideways trend.
From 2003 the market more than doubled over the next four years. And roughly one year after markets finished going sideways in July 2011, the market took off as the Aussie low interest rate, dividend yield rally began — gaining around 35%.
In other words, if you expect a crash and you plan on going short, make the most of it, because if it happens, it’s not likely to last long.
But as we’ve written for some time, we don’t expect stocks to crash at all. In fact, we expect the opposite.
With interest rates low and staying low for a long time, it’s all helping to stoke the fires of a raging bull market.
Not many folks believed us when we said rates are staying low. Plenty of folks foolishly thought the Reserve Bank of Australia (RBA) would start raising interest rates next year.
Hah! Not a chance. And even if there were a tiny chance, the release of the RBA minutes from its last meeting should put the kybosh on that idea. As the Australian reports:
‘Low interest rates are likely to continue for a while yet as the Reserve Bank of Australia waits to see how the nation’s current economic challenges play out.
‘In the minutes of its August 5 board meeting, the RBA warned of a “significant degree” of uncertainty about the economic outlook, but reaffirmed its view that a period of stability in interest rates was likely to be prudent.’
The RBA is giving the game away.
They’re telling you what to expect. The Reserve Bank of Australia is telling you not to worry about rising interest rates. That means you need to get used to investing in a low interest rate environment.
One of the best places to invest in a low interest rate environment is stocks.
Remember, the market has gone sideways for the past six months. Soon it will break out higher or lower. If it goes higher, you should expect the market to move high fast.
If the market breaks out lower, don’t panic. If recent history tells you anything, it’s that stocks should recover and move higher about a year later.
This is why we don’t want you to put all your money in stocks. Just in case it goes lower, we want you to have spare cash to buy stocks at a lower price.
Watch the market for a breakout. It will happen soon.
Cheers,
Kris+
The post Why Stocks are Set to Soar When This Trend Ends appeared first on Stock Market News, Finance and Investments | Money Morning Australia.