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Thursday, 13 December 2018
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Australia Is Not The US

We are not out of the woods clearly, the volatility remains. The Dow was up 458 at best last night and gave away 300 points into the close. That follows five days of the Dow Jones trading in a 500 point range for the first time in 10 years. Happy to see the market attempt to rally, but the technical picture is still pretty ugly and the buy signals are only very short term so far.

Despite that dose of reality I’m very happy to report that in the last three days including today, the MT GROWTH PORTFOLIO has markedly outperformed the rising market, even outperforming the 1.38% rise in the ASX 200 yesterday. The large quality growth stocks growth stocks (ALL, ASX, COH, CPU, CSL, MQG, REA, RMD, SEK, TWE, WEB) that hurt us badly in the sell-off are leading the rebound. Let’s hope that continues.

As I wrote yesterday, having ridden these stocks down and underperformed because of it, I am not about to restructure the portfolio by running up cash or switching into boring defensive stocks. We have to get the performance back before becoming a chicken.

This is the weekly chart of the S&P 500 over five years showing the break of the uptrend support in the last month and the trading range since the market hit the wall in February. Clearly from a technical point of view there is nothing saying “BUY” yet. About as optimistic as it gets is to suggest that the S&P is closer to the bottom of the one-year trading range than the top, who’s to say 2532 (the February low) will hold.

You also see below that the RSI of the S&P 500 is at 42. In the last ten years the RSI on the weekly chart has only been this oversold twice, once at the bottom of the market in 2016 and once in 2011. A big index like this rarely gets oversold but it is clear the downside momentum is significant on a multi-year timeframe.

 

IS AUSTRALIA THE US

From the performance of the Australian market compared to the US in this correction (we are down 10.4% and the US is down 11.3%) anyone would think we too have had:

  • A tech boom in the last two years.
  • An economy that was flying along.
  • Rising interest rates.
  • A decade of quantitative easing supporting the financial markets.
  • A trade war with China.
  • …and a President tweeting changes in international policy on a whim.

The Australian market which went up 31% in the two-year bull market before this correction has dropped the same amount as the US market which went up 61%. It has also sold off just as hard as the NASDAQ index which was up 93% in the last two and a bit years and is still up 68% compared to our 17%.

You have to ask, are the US problems our problems in equal measure? We live in a global market, and we are all interconnected, but if Apple falls 25%, should Cochlear, should CSL, should Macquarie bank, should Treasury Wine Estates, should Aristocrat Leisure? But they have.

Here is a chart of the performance of the Australian market compared to Europe, the S&P 500, and the NASDAQ.

A few bullet points:

  • Australia is up 17.26% since the bottom of the market in 2016. At one point it was up 31%. It is down 10.4% from the top.
  • The STOXX 600 index (the top 600 stocks in Europe) is up 13.9% since the bottom of the market in 2016, at its height was up 29%. It is down 11.7%.
  • The S&P 500 is up 42.7% since the bottom of the market in 2016, a couple of months ago it was up 61%. It is down 11.3%.
  • The NASDAQ index is up 68% since the bottom of the market in 2016, two months ago it was up 92.9%. It is down 12.9%.

To express it another way - The Australian market has fallen by the same amount in percentage terms as the S&P 500 and the NASDAQ despite the S&P 500 rising twice as much in the bull market and the NASDAQ rising three times as much.

But the counterargument to this is that while the US negatives listed above may not apply specifically to Australia, even if Australia was immune from them, we still have our problems.

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