{"id":58077,"date":"2014-08-18T01:35:13","date_gmt":"2014-08-18T05:35:13","guid":{"rendered":"http:\/\/countingpips.com\/?p=58077"},"modified":"2014-08-18T01:35:13","modified_gmt":"2014-08-18T05:35:13","slug":"how-the-stock-market-scores-on-the-crash-scale","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2014\/08\/how-the-stock-market-scores-on-the-crash-scale\/","title":{"rendered":"How the Stock Market Scores on the \u2018Crash Scale\u2019"},"content":{"rendered":"
August 18, 2014<\/div>
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By MoneyMorning.com.au<\/u><\/a><\/p>\n

Well, that appears to be another imminent crash threat that has come and gone.<\/p>\n

It’s not the done thing to say, ‘We were right.’<\/p>\n

But we were. So we’ll say it. We were right.<\/p>\n

The Australian share market<\/a> is now almost back to where it was on 31 July. That was the market’s highest point in six years.<\/p>\n

And for the year the Aussie market is up 4%.<\/p>

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It’s not a stunning return, but it’s hardly a complete fizzer either. Not only that, but it’s a poke in the eye for those who claim the stock market<\/strong><\/a> is at the top of a bubble.<\/p>\n

It’s not. In fact, according to a team of US analysts in a report from earlier this year, stocks only show two out of the nine<\/u> characteristics you’ll normally find in a bubbly market…<\/p>\n

The Financial Times<\/em> explained the research in March this year:<\/p>\n

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‘In a checklist of nine factors that it says in 2000 and 2007 signalled a peak for equities, <\/em>[research firm] Strategas says only two are currently flashing red today.<\/em><\/p>\n

‘One is rising real interest rates — as shown by meek inflation and 10-year Treasury yields near 2.80 per cent.<\/em><\/p>\n

‘The other is weakening upward earnings revisions.<\/em>’<\/p>\n<\/blockquote>\n

In bad news for crash watchers, it seems that since then, there is now only one<\/em> of the signals flashing red.<\/p>\n

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Front-running returns<\/strong><\/h2>\n<\/p>\n

Since March US interest rates<\/a> have continued to fall. As the following chart shows, the trend in the US 10-year bond rate is clearly heading down:<\/p>\n

<\/a>
\nSource: Bloomberg<\/em>
\nClick to enlarge<\/a><\/em><\/div>\n<\/p>\n

The above chart is a five-year chart. You can see that interest rates began going up in May last year. That was when the market started to worry about the US Federal Reserve<\/a> tapering its bond-buying program.<\/p>\n

But now that the taper is in full effect, the market has realised that it doesn’t really make a difference. The market knows the Fed (and every other central bank) will jump back into the market at the slightest sign of trouble.<\/p>\n

That’s why you’re seeing interest rates fall. Big investors know the current bond-buying program is about to end. Logically that should mean interest rates would go up.<\/p>\n

Except, if investors figure that another program will soon be on the cards, they plan to buy bonds now in expectation of yields slumping back to record lows in the near term.<\/p>\n

And because bond yields move inversely to bond prices, it means that those investors would get a nice capital gain on their bonds.<\/p>\n

Who said front-running the Federal Reserve<\/a> was a dead strategy?<\/p>\n

So with only one out of nine top-of-the-market signals flashing red, what does it say about today’s market?<\/p>\n

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Don’t sell at the wrong time<\/strong><\/h2>\n<\/p>\n

The simple answer is that stocks aren’t currently in a bubble.<\/p>\n

So the latest ‘crash alert’ was exactly what we said it was — a false alarm.<\/p>\n

These false alarms are becoming a regular event. The market goes on a nice run, and then something happens out of the blue that causes markets to go into a meltdown.<\/p>\n

Novice investors sell out in a panic just as stocks<\/a> hit the low point. Then the stock market rebounds, and the same novice investors buy back in…missing out on the gains.<\/p>\n

But those are the lucky ones.<\/p>\n

The unlucky ones are the investors who sell in a panic and are then too scared to buy back in at all. So not only do they miss the rebound rally, but they miss the ongoing rally too.<\/p>\n

They’re waiting…waiting for the crash they believe is inevitable. Except it isn’t.<\/p>\n

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Why selling could harm your portfolio<\/strong><\/h2>\n<\/p>\n

OK, we’ll qualify that. All crashes are inevitable. The stock market never goes up in a straight line.<\/p>\n

But if they’re waiting for the crash to happen in the near future, they’re in for a big disappointment.<\/p>\n

Crashes don’t happen when everyone expects them to happen. They happen when no one expects them to happen. They happen when investors start believing that a crash can’t happen — because this bull market is different to other bull markets…this one is sustainable forever.<\/p>\n

When we hear folks saying that, that’s when we’ll start to sound the alarm.<\/p>\n

But so far we haven’t heard anyone say that. Most investors are on edge. They’re still worried about the last crash, fearing another boom and bust will happen again.<\/p>\n

That’s why so many get scared when irrelevant events in Russia, Iraq, Ukraine, China and Europe hit the front pages.<\/p>\n

They remember the 50% fall in 2008 and want to make sure the next crash doesn’t catch them unawares.<\/p>\n

The sad thing is, by shifting in and out of the stock market<\/a>, they could be doing their portfolio more harm than good. For a start they’re racking up commission charges.<\/p>\n

Second, they may be triggering capital gains tax liabilities. Third, they could inadvertently miss out on ex-dividend dates for a stock that’s about to go ex-dividend.<\/p>\n

And fourth, there’s no guarantee that when they buy back in they’ll buy at a price that makes the whole thing worthwhile.<\/p>\n

In short, keep your eyes peeled for an event or events that could cause stocks to crash. But for the sake of your wealth, avoid the temptation to let every non-story panic you into selling stocks.<\/p>\n

Despite the fear campaign, this market still has a long way to run.<\/p>\n

Cheers,
\n Kris+<\/a><\/strong><\/p>\n

PS:<\/strong> I covered the idea of ‘fake crises’ at the World War D<\/a> conference earlier this year in Melbourne. It was a cracking event. If you didn’t attend, the good news is we recorded the presentations. This week we’ll let you know how to get your hands on a copy of the footage. Stay tuned. In the meantime, today you’ll find an article on fracking<\/a> from another of the keynote speakers at World War D, international resources and military technology expert Byron King.<\/p>\n

Join Money Morning on Google+ <\/u><\/a><\/strong><\/p>\n

The post How the Stock Market Scores on the \u2018Crash Scale\u2019<\/a> appeared first on Stock Market News, Finance and Investments | Money Morning Australia<\/a>.<\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n


\nBy MoneyMorning.com.au<\/u><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au Well, that appears to be another imminent crash threat that has come and gone. It’s not the done thing to say, ‘We were right.’ But we were. So we’ll say it. We were right. The Australian share market is now almost back to where it was on 31 July. That was the market’s […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-58077","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/58077","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=58077"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/58077\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=58077"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=58077"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=58077"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}