Welcome to Finance and Fury. Today is a share market update. Don’t get tricked by the rebound in prices. We will be looking a bit into the pattern recognitions in relation to markets

The market is low compared to 3 months ago – if looking at 10 years in the future – would be a bargain – but does this mean it is at the low point

Look at major declines of the past – how they have compared – but also the repeating patterns they have

Taken a massive battering initially – price declined by historic rates – almost came out of nowhere –

Went through previous pandemics in the past – never been a decline like this – the markets always continued to grow – what is different – governments shutting the economy down –

Going through a dead cat bounce – or seems to be –

How the market works –

  1. The worst was priced in initially – markets are liquid – and they freak out
  2. Hits a low point – people enter the market
    1. But this all occurred As announcements of shut downs start –
  3. But then recovers – it seems counter intuitive – before the actual announcements started
  4. There has been little in the way of truly positive news
    1. News – Government bail outs and Central banks entering additional QE or debt buyouts for the Fed for large companies in the USA – but long term is this a good thing?
    2. New stimulus measures for spending but this all comes off the back of deficit spending – or debt –
      1. Spending on your and your children’s Credit cards – your futures-
      2. Might give some initial positive response but longer term – is a bad thing when compared to true economic growth void of the government or central banks taking control over the whole market

On the fundamentals side – these governments will likely have a wide spread reach

  1. What is the share market – a speculative price instrument
  2. It doesn’t have too much with the fundamentals – but the perception of fundamental performance of the economy

Examples – Lets look back to the GFC –

  1. Prices went from about 6,784 to 5,127 initially – about a 24.5% decline – pretty big
  2. But then they rebounded by 15.7% – going to 5,127 – before losing about 18.4% – going down to 4,840

 

These patterns – Have a very similar pattern to Fibonacci ratios i.e. 61.8%, 38.2% and 23.6% often find their application on stock charts. Whenever a stock moves either upward or downward sharply, it tends to retrace its path before the next move.

  1. The Fibonacci sequence is a series of numbers, where a number is found by adding up two numbers before it. Starting with 0 and 1, the sequence goes 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, and so on and so forth till infinity. If we divide any of the number in the series by the previous number; the ratio is always approximately 1.618. The ratio of one number divided by the next settles at .618, which is known as the golden ratio. In nature, this is the proportion of a perfect spiral, like that.
    1. Can look at plants or trees – or even an artichoke or a pinecone – the number of rings in each of the layers of plants are in order of the golden ratio – or even in a sea shell – is observable all around in nature if you are looking
  2. When I was younger – I get really into this – Forecasting Financial Markets – The psychology of successful investing – great book that details this – is a detailed ones – about 450 pages – and goes pretty in depth into complex topics – but anyone interested in the subject – well worth it
  3. The use of the Fibonacci retracement is subjective – traders may use this technical indicator in different ways
    1. traders are all watching and using the same levels or the same technical indicators, the price action may reflect that fact. 
  4. This goes into detail about the human psychology along with the self-fulfilling proficies of markets – once a repeatable pattern is known by investors – like the Fibonacci ratios – do traders then set their buying and selling conditions around this? And if they do, does this not create the market patterns that play out?

Now – not exact – but rounding for the market numbers is taken into account –

  1. Fibonacci sequence sees ranges around the 62% mark – 40% mark and 23% mark-
    1. Looking at the GFC – had an initial loss of 24% – then a rebound in prices by 65% – then a drop by 20% but a rebound by about 34% – then a drip by 34% then a rebound by 26% –
    2. Looking at the most recent declines – we are now at about a 23% decline from peak – after an initial 32% decline – but had a 42% rebound in prices compared to the collapse (14% price gain from the low)

Start to see the pattern? The numbers coming into the patterns of the market –

  1. Never in history has there been a massive drop in the share market like we have seen but then – all of the sudden the market just recovered and continues to climb without then taking another down turn
  2. There has always been a flow of the market going up and then back down – profit taking, to a self-fulling prophecy – who knows

Why does this phenomenon occur? Could be any number of reasons –

  1. This week – the market may start to lose steam – or technically continue to gain in prices to the breaking point –
    1. There is obviously no way to be sure – but reading the tea leaves that at the charts – there may be two options
    2. One – the market starts to drop from here – there has been a large initial gain of about the 14% mark – in a matter of weeks – but more likely is number two – but no guarantee of this
    3. Or two – the rebound goes to about the 5,780 mark and then takes the next downturn – would take another 2 or so weeks – so be looking towards the end of this month (April) and then the market starts its retreat
  2. Working off the numbers – we are at about a 42% rebound – but due to the large initial drop – not unexpected for the market to continue over the next two or so weeks to continue pushing up in price to the 64% rebound point – at the 5,780 mark before taking the next plunge

Honestly – it wouldn’t surprise me that over the next 18 months – with the way the Governments are handling this and requiring immediate intervention from Central banks – that this is a long drawn out decline –

Will have rebounds along the way – but can be the dead cat bounce trap

 

That is where there will be plenty of bad market news to come –

These shut downs are going to wreck the economy in the long term –

Go into it further on Friday – but when it comes to the share market – lets think about what it is made up of –

The largest companies that are listed –

But these don’t make up the whole economy – we do –

All the mom and pop stores – so to speak – or smaller businesses out there that employ a large chunk of the population –

They are who are getting affected by these shut downs –

The larger companies – lets go through the top 20 in the ASX –

  1. These are what make up 60% of our market – remember this – most of out market is made up of 20 companies – looking at the ASX300 – 280 companies make up just over 40% –

Health Care

10%

10.21

Financials and Real estate

23%

22.57

Materials, Industrials and Energy

16%

15.64

Consumer Staples or Discretionary

7%

6.98

Telecommunications

2%

2.46

  1. Breakdown –

 

Looking at the fundamentals of spending – What are the industries that have been affected –

  1. Gyms and Fitness – down 96%
  2. Entertainment and venues – down 90%
  3. Travel – down 84%
  4. Public Transport – down 80%
  5. Cafes – down 42%

 

These industries make up a fraction of the overall listed market – but – make up a massive amount of the whole economy

  1. Why I keep saying the ASX and all share markets come back to a more speculative side as opposed to fundamentals to the whole economy – which is currently being crushed by government policies
  2. Go into this further in Friday’s episode – but the ones that will come out on top in all of this are the large companies that are allowed to remain open in this period – Amazon, the banks who are protected from legislation from TBTF – along with a range of other industries

But when it comes to each of the major industries – the spending on these has actually increased for the most part –

  1. Health Care – Pharmacies – up 18%
  2. Industrials and Real estate – Well home improvements up by around 14%
  3. Consumer staples – food delivery increased by about 59% – and spending at super markets hasn’t really dropped – if anything had a spike initially with all the hoarding of TP and other goods
  4. Financials may take a hit though – with credit applications being down around 35% and increasing financial distress

Again – that is where the share market as an aggregate is hard to predict and price in – as it has become purely speculative in the modern era since Milton Freidman’s -Shareholder value theory came in

Getting back into the share market –

  1. It still does have some base in expectations – expectations of pricing – prices and profit taking –
    1. For the larger institutions who are in the know – who have the ear of politicians – the same politicians who also miraculously sold off all their share holdings just before the market crash (as most politicians are exempt form insider trading due to holding public office) – they can utilise these known events to sell down –
    2. Thus creating a self fulfilling prophecy when it comes to market declines – then – but back in at a lower point and then sell once the gains reach a desired level –
  2. Whilst the economy is tanking – the companies that make up most of the ASX are likely to benefit longer term – as they are a protected class – but that doesn’t mean their prices wont go down from there –
  3. Again – the market is a speculative environment –
    1. News about the economy or pretty meaningless measurements to our every day lives like GDP will effect the market – that is the distinction to make –
    2. What is bad for us can sometimes be good for the market and vice versa

Summary – As I said – no way to tell really which way the market will go – but at this stage –

  1. After such a quick rebound after such a large drop – the largest in history in such a short time frame – wouldn’t be out of the norm to expect another down turn from here –
  2. How low the market goes – again – is very subjective to the whims of the selling that are on mass –
    1. Wouldn’t put it past the market hitting the 4,400 mark – or about another 18% drop from here – then – having another smaller rebound before going into the 3,800 at the low point – but this is purely speculation –
    2. Would require a number of events to play out – but unlike previous crashes – the monetary policy has been at the forefront of this – which is also a little suspicious – almost as if the policy responses were already to go
    3. So hitting the sub 4,000 mark may be less of a probability when compared to previous historical crashes – but not outside of the norm in the grand scheme of things

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

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