The Weekly Wrap

Market Update

ASX 200 Index (XJO)

In the Weekly Wrap of March 26, we produced the chart below showing the XJO stuck in a 4 month trading range. The commentary at the time was that the longer the XJO stayed in the range the bigger the breakout would be, despite the direction. Fast forward top today and the XJO is trading at 6974 at time of writing. This is almost 150 points higher and is a clear sign of the index breaking out of the range.

Where to from here?

The answer to that relates directly to the context of where we ‘are’ in the market cycle. Is the market showing signs of optimism or pessimism? Are valuations for shares at levels which could be considered expensive? Is the market moving higher on healthy volumes?

It may seem as if this rally will never end (especially in house prices), however, these are the same sentiments that were being expressed 12 months ago. When the investing market is “all-in”, there is little room left to keep going higher. At some point soon(ish), the market will correct and it would not be surprising if the market tested the lows of March last year at 4430 points for the XJO.

The XJO is reaching for an all-time high, yet the technical measures have been falling or are at extreme levels. This is indicating that the market is exhausted.

US Market Update

One of the ironies of a market top is that it is often held out as the start of a boom, when in fact it is at the end. We have noted many extremes of investor sentiment in the past few weeks, yet the optimism is unbridled right now.

The CEO of Palo Alto Networks in America has said that “the next 10 years is going to be the golden era of tech”. Wonder what the past 25 years have been then?

The past year has seen hordes of inexperienced investors enter the market. Inevitably they have headed to the irresistible lights of the tech sector, with Tesla the brightest beacon of all. As we can see from the chart below, Tesla shares peaked back in February at US880 per share. the 22% fall in value since then has not perturbed the novices, instead they are “buying the dips”, as all novices do.

There is even a notoriety attached to being a new an inexperienced investor, with a belief that social media has leveled the playing field. Newcomers are reveling in their ignorance and the WallStreetBets Reddit forum is littered with posts from contributors who describe themselves as idiots and losers. It is important to note that the rise of these investors is a vital and sure sign that a market top is in process.

Accompanying this lack of knowledge has been the rise to prominence of Bitcoin. The appearance of the crypto currency on the cover of Newsweek and Time magazines recently is bad news for the future. There is a phenomenon established by Paul Montgomery, known as the Magazine Cover indicator, which proposes that when a financial trend makes the front cover of a general interest magazine, which is rare, that trend is near exhaustion. Mr Montgomery suggested that there was a lag of a month or two from the appearance on the cover to the reversal in prices. On that basis, the reversal for Bitcoin may be starting around June this year.

Summary

Based on a number of readings, the financial world is at a peak not seen in many years. Whilst the GFC was a top, it was only temporary. The current situation appears to have produced extremes in everything, especially global debt levels. For an extensive look at global debt levels and why it may be too late to turn around, click here.

It is important in times like this to make sure that you are not exposed to too much risk in your portfolio. A review of your holdings may allow you to reduce some exposure when the market is running hot. There is a saying that it is better to be safe, than one day too late.