There’s an old saying that goes, ‘It takes two to make a market.’
OK, as sayings go it’s not quite on a par with Confucius, Einstein or Snooki.
The point is, in order for a market to form, you need at least one buyer and one seller. They agree on a price and a transaction occurs.
The stock market works on a much bigger scale. When a company releases bad news and the share price hits the skids you wonder just who it is who’s in there buying the shares?
Yet regardless of the bad news, some investors choose to buy. Why? Because, based on their own analysis, they think the stock is cheap. They figure the price has hit rock bottom and it can only go up from there.
Sometimes they’re right…and sometimes they’re wrong. So, how does this all fit in with the Aussie market? Now that it’s fallen 20% since April 2011 and 40% since the 2007 peak?
Well, it’s led to the bulls and bears facing-off in the Port Phillip Publishing editorial office. And so far, the bears are winning…
If we’re honest, it feels kinda strange being in the ‘bullish’ camp.
It’s a place we haven’t been in for a while. And with everything that’s going on in North America, Europe, and even here in Australia, it’s hard to believe we’re in this market buying stocks.
But, despite the fears about a Chinese slowdown…a Spanish/Italian/Greek bailout…and US unemployment levels still near 2008 highs, it’s hard to look at a lot of Aussie stocks without feeling that they’re cheap.
Of course, not everyone takes the same view.
Because while we’re buying, there are others in the market selling. Including our old pal, Slipstream Trader, Murray Dawes…
We asked him last week (perhaps hopefully) if he thought the 8% drop in May was the crash he had waited for. It turns out the 10.3% drop from the start of May to the first week of June is simply the entrée to what Murray sees as the main course.
That is, a potential 1,000 point drop from here.
If that happens we’re talking about the market falling below the 2009 low…when the global economy was on the edge of complete failure.
So could that happen? It seems crazy considering how far the market has fallen already. But Murray has some pretty convincing evidence to back his view.
For the past year the S&P/ASX 200 has traded around the key level of 4,200. We can show you this on the following chart:
The red line is what Murray calls the ‘Point of Control’ (PoC). The PoC acts like a gravitational point for the market. Again, you can see how the market has traded above and below this level since late last year.
Now, you may look at that chart and think, ‘Hang on, if the red line is the gravitational point, doesn’t that mean stocks will start to head north…so that now is a good time to buy?’
That’s the bet we’re taking. That with stock prices taking such a beating, investors will look for value and buy stocks at beaten-down prices.
But before you rush out to increase the limit on your margin lending account and bang out a few buy orders, Murray has a word of caution:
‘If the market sells off below the Point of Control…and DOESN’T break back to the 4,200 level…that’s when a huge momentum shift occurs.
‘People who are “long and wrong” [investors who bought at high prices] from the top half of the distribution will start to dump positions, giving the bears the upper hand to sell aggressively.’
Ominously, Murray adds:
‘That’s when the MASSIVE big sell-off begins.’
We’ve followed Murray’s analysis for a few years now. He rarely gets it wrong. Murray’s analysis is about weighing up the balance of probabilities.
He’s not saying the stock market will definitely fall 1,000 points. But what he is saying is that the stock market is trading at a key level, and if it falls below this level you will likely see a rapid and vicious fall in stock prices.
This probably explains why Murray has set his traders up on the short side (betting on falling share prices). He’s got a bunch of open short positions, and as of right now, all of them are in the money.
So right now, the bears are winning. That’s understandable when you consider everything that’s happening to the global economy.
Just remember that it takes two to make a market. At some point (that could be today…or when the market is 1,000 points lower) the market balance will shift.
Today the momentum is clearly in favour of bearish traders. So only investors with extreme levels of risk tolerance should even think about buying shares.
Cheers,
Kris.
P.S. Look out for Murray’s latest special report. It should be in your inbox within the next couple of days. In it he explains exactly why the market has further to fall and how investors can still prepare themselves to avoid the worst of it.
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