Rudi’s View: A Bear Market Anomaly That Confuses

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 | May 05 2022

In this week's Weekly Insights:

-A Bear Market Anomaly That Confuses
-Australia; The Peak Is in!
-The World Is Changing
-June Index Changes
-Rudi Talks

By Rudi Filapek-Vandyck, Editor

A Bear Market Anomaly That Confuses

2022 is not your garden variety share market, but the weirdest anomaly surely must be in stockbrokers' recommendations for individual ASX-listed companies.

As at the end of April, and with the ASX200 still within reach of its all-time high, total recommendations for the seven stockbrokers monitored daily by FNArena on 437 individual stocks comprise of 60% Buys (and equivalents) versus less than 35% in Hold/Neutral ratings and Sell ratings close to 5%.

What makes this set-up so unusual is that, historically, such a large percentage in Buy ratings, and respective low percentages for Hold and Sell recommendations, points to bear market conditions for the local share market.

The numbers are well out-of-whack with long term averages since FNArena started compiling these data back in 2006. The only precedent over the past 16 years occurred in 2011 when financial markets were gripped by anxiety that debt-laden Greece might turn into the bombshell that would cause the implosion of the European Union.

That scenario ultimately did not happen, but until that confidence-fueling declaration made by ECB president Mario Draghi in July 2012, financial markets could not shake off the threat of a worst case outcome. Thus share markets didn't go anywhere. Stockbrokers in Australia responded by issuing ever more Buy ratings, which at that time peaked above 60% of all recommendations. Sell ratings, similar to today, bottomed at 5% - the lowest percentage recorded throughout the 16 year period.

Note that during the GFC, the total percentage of Buy ratings peaked closer to 55%, as occurred again post-GFC in 2010. Both in 2008 as again in 2010-2011 such extreme readings in broker recommendations ultimately provided a positive signal for favourable entry-points for investors, though in both cases a healthy dose of patience was still required.

If we assume today's signal will equally prove as positive as back in 2011 and 2008, how then can we explain the key difference in price action? Back in 2008 shares were going through the worst bear market in living memory and in 2011 investors had to bide their time until the ECB president inspired a strong rally that quickly closed the gap between moribund share prices and intrinsic valuations.

If we are in a bear market in 2022, the typical pattern thus far in Australia is predominantly showing up through extreme volatility. The past four months have seen a number of sharp sell-offs, but equally of sharp recovery rallies. Year-to-date, and after a mildly negative April performance, the ASX200 is close to unchanged for the calendar year thus far. Over the past twelve months its performance stands at a positive 8.40%.

But the ASX has been outperforming most of its peers globally. Global equities, as per the S&P Global BMI proxy, are now down -11.55% calendar-year-to-date and compared with twelve months ago the performance is a negative -5.37%. The S&P500 in the US is down -9.65% since the start of 2022, and holding on to a narrow 3.94% gain left for the twelve months past. The tech-laden Nasdaq has lost more than -21% to date in 2022.


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