Stocks are still going up…barely.
We don’t mind admitting, it feels as though it would be easier to get blood from a stone than to get this market to punch any higher.
After the usual doom and gloom junk about October being a terrible month for stocks, what do you know? Just as we said it would, October this year turned out to be a pretty darn good month for stocks.
In fact, it turned out even better than we expected. The Australian market climbed 3.96%.
But since then it has been painful watching the market rise or fall by just a few points either way. It’s almost as though Australian stocks have gone into a coma.
So, is there anything we can read into this? Let’s see…
One stock we can’t blame for holding back the market is Commonwealth Bank of Australia [ASX: CBA].
Over the past four weeks it has surged from $71.57 to yesterday’s close of $79.32. That’s almost bang on a 10% gain…more than double the gain of the S&P/ASX 200 during the same period.
Another stock we can’t accuse of being a laggard is BHP Billiton [ASX: BHP]. It has climbed from $34.89 four weeks ago to yesterday’s close of $38.24.
One bank stock, one resource stock. Both gain 10% in short order…for very different reasons.
Investors Still Putting ‘Safety’ First
For a start it proves that the ‘safety’ trade is still alive. Investors still want dividend stocks, and they’re prepared to pay for it.
Now, we’ve put ‘safety’ in quote marks, because arguably the Australian banking sector isn’t as safe as most people think…not when it benefits from what US hedge fund manager Jeremy Grantham calls one of the last great asset bubbles – Australian housing.
But when the market’s going up – just like when house prices keep going up – people assume it’s the safest investment, and so they buy more.
What about BHP? Surely it’s hard to call a resource stock ‘safe’ in this volatile market.
Maybe, maybe not. If you’re a conservative investor but you want exposure to the Australian resource sector, or if you just want a completely balanced portfolio, it’s hard to ignore the Australian market’s biggest stock.
So again, in a way, a rallying BHP shows you that most investors are sticking with safe stocks rather than risky stocks.
That’s why, even though most income stocks are trading near to fair value (or in some cases over fair value), we continue to recommend income stocks in Australian Small-Cap Investigator.
For the simple reason that not only can you get paid (with dividends) in a sideways market, but if investors continue their search for yield and interest rates stay low, you’ve got a chance to lock in capital gains too.
A Market in Need of Reassurance
So, when you get that type of market behaviour two things can happen.
After piling into ‘safe’ stocks, investors may soon realise those stocks aren’t so safe after all. That scenario looks like playing out today following falls in Europe and on Wall Street.
Even the ‘safe’ stocks are likely to take something of a beating today.
But, if our hunch is right, today’s downturn will be a short-lived event. We’re not about to run out clichés such as ‘the market is due for a pullback’ or ‘this creates a buying opportunity’ – even though both clichés are probably true in this case.
You have to look at the reason why US stocks fell: the latest US GDP number was better than the market expected. Why is that bad news? Because investors have got themselves into thinking that the US Federal Reserve will stop printing money and raise interest rates.
Really, that isn’t about to happen. Yet it hasn’t stopped the market having a panic attack. That’s what the market does from time to time. It behaves like an over-anxious kid who needs constant reassurance. ‘Calm down, everything will be fine…here’s a lolly.’
In this case the lolly will be coded messages from US Federal Reserve members letting the market know that money printing and low interest rates are here to stay.
Six Figure Stake to Make a Four Figure Profit?
When that happens – as it almost surely will – you’ll get another surge back into stocks. The dividend payers should get the first burst of gains, followed by the growth stocks.
We can hardly believe we’re saying this, but it wouldn’t surprise us if CBA went even higher. Broking firm Bell Potter now has an $82 price target on the stock.
Whether you should buy CBA is another matter. To us buying a $79 stock for the potential of a $3 gain doesn’t make a lot of sense.
We prefer buying 20 cent stocks for the potential of a $3 gain. For a start, because of the huge potential, you only have to risk a small amount of cash – $500 in a 20 cent stock that goes to $3.20 will turn into $8,000.
To make the same profit on CBA going from $79 to $82 you’d need to invest a staggering $197,500. That’s a stake most investors can’t afford.
Of course, you won’t make those returns on every small-cap stock punt. And small-cap stocks are high risk; – you can lose the money you invest.
But here’s some breaking news: you can lose money on blue-chip stocks too.
It’s about working out the best risk versus reward scenario in the market and then acting on it. In our view, as much as we like the chances of the Australian market going much higher from here, we’ll caution you about investing in what most people perceive as ‘safe’ stocks.
Because when it comes to the crunch, ‘safe’ stocks can fall too, and you’ll soon realise they aren’t so ‘safe’ after all.
Cheers,
Kris+
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