Look! It Quacks Like A Duck!

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Nov 22 2018

In this week's Weekly Insights:

-Look! It Quacks Like A Duck!
-Rudi On TV
-Rudi On Tour

Look! It Quacks Like A Duck!

By Rudi Filapek-Vandyck, Editor FNArena

"If it Looks like a Bear and Trades Like a Bear, Stop Trading it Like a Bull."
(Morgan Stanley strategists in a recent market update)

It may take a while yet before the general commentariat is willing to accept that dynamics for global equities have now irrevocably changed. However, on my observation, today's equity markets are increasingly showcasing the main characteristics of a bear market.

Does this mean we are guaranteed staring at losses of -20% and more?

No. But we might.

What is not well understood by many a market participant is that downturns, trend reversals (or call it whatever you want) like the one we are experiencing right now are not an outcome that is already set in stone. It is a process consisting of multiple stages, and the ultimate outcome will be decided by what comes next, and how we as a global community respond to it.

Take the opening months of 2016, for example. Declining global growth, falling oil prices and a Federal Reserve intent on continuing tightening created a poisonous cocktail that was similarly pushing equities into a downward spiral. That only stopped from the moment the Fed gave in.

This time around the Fed pausing its tightening might act as the necessary circuit breaker, as would be a genuine agreement between the Trump administration and China, or a much stronger economic background; but so far none of these scenarios have emerged, and financial markets clearly are not going to sit around, waiting for Godot.

In the meantime, and I am not the only one making this observation, trading activity inside the Australian share market very much resembles that of a genuine bear market. Bad news is being punished without recourse. Good news might trigger a share price rally, but that subsequently becomes a source for taking profits and raising more cash. No news can mean anything, but most likely the stock is being sold off on flimsy correlations and spurious projections.

On some days, nothing really matters. If your stock is listed, and widely owned, it will be sold, simply because other shares are too. No room for exceptions.

All of a sudden, risk is everywhere; better not to take any chances.


One recent example of how market dynamics, and investors' attitude, has changed is REA Group ((REA)). Prior to the release of its quarterly trading update, which proved significantly better than what worried investors had been expecting given the downturn in the local housing market, the share price was trading in the low $70s.

Following the release of the quarterly update, REA Group shares jumped as high as $80.50 (and even higher intra-day) but they have subsequently retreated back to the low $70s again. Stockbroking analysts did respond positively to the better-than-expected operational performance, but nobody cares. Clearly, investors prefer safe profits and cash. Besides: this housing downturn is going to last a while yet. REA Group might not be able to stay immune.

And so the narrative goes.

What happened to REA Group equally happened to a2 Milk ((A2M)), Altium ((ALU)), Appen ((APX)), Brickworks ((BKW)), Elders ((ELD)), Xero ((XRO)), and others. Good news is no longer being rewarded and if it is, it won't stick.

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