Market psychology: Here, it’s time for a moment of pause. The whirlwind of panic-selling and confusion that has stripped market participants of their rational faculties has laid the fertile soil for the described narrative to flourish. It’s not that individual traders aren’t aware of this either – the hysteria is easy to see, and more importantly see through. But when your money is on the line, and precious profits are being eroded, why hold your position when you can’t be sure that everyone else isn’t crazy? Or even more appropriately: why hold your position when you can’t be sure that everyone else isn’t thinking that you are crazy, and that they aren’t about to dump their positions in anticipation of you dumping yours in some hysterical haste? Either way, as a rational, self-interest investor, it’s best not to risk it – sell now and take profit before the herd wipes it all away.
Waiting for calm: So now markets get stuck in a death spiral, and though plenty of contrarians try to pick a bottom, most generally get swept aside by the wave of selling. The weekend couldn’t come sooner for markets now because a break from the madness is needed to regain some equanimity. A focus on the fundamentals is required, to assess where true value lies in the current market milieu. Price action on Wall Street last night indicated signs that perhaps this is beginning to manifest: the session saw another close in the realms of 1%-2% lower, but the extent of losses vacillated throughout the day. US tech, which with its high concentration of rate-sensitive stocks, demonstrated that investors still have appetite for growth stocks, with the Nasdaq
registering the smallest losses of the major US indices.
Day ahead: Risk appetite won’t be whetted by what happened on Wall Street (or Europe too, after credit spreads blew out again courtesy of new animosity between Rome and Brussels) overnight. Futures markets are pointing to another ugly Asian session, characterized by some rather aggressive selling. Buying into equities anyway (no-less in riskier Asian markets) at this time would be considered especially imprudent. Safe-havens will be in vogue today: the growth-versus-risk proxy, the AUD/JPY, remains wedded to the 79.00 handled, US Treasuries have climbed, with the yield on bench mark 10 Year note falling to 3.13 per cent (perhaps supported by last night’s soft US CPI print), while the USD is being punished, driving funds into gold, which has torn above the $US1220 price.
Australia: SPI futures point to a 47-point drop at the open for the ASX 200, with IG pricing suggesting the market should land just above support at 5810. If this proves to be so, and a close below 5860 is registered, a 2-and-a-half-year trend will come to an end. Health care stocks may see some staunching of their falls, if the activity in US tech is anything to go by; but the energy sector and materials space will likely struggle, given the drop-in oil prices to $US80.00 last night, coupled with the general dip in commodity prices. The Australian Dollar is experiencing strength, but only because of a weaker USD, with the strength of our currency possibly hinging on how well the contained slide in the Yuan can be managed by the PBOC. All in all, the day shapes up as another challenging one, as Australian investors enter the final trading session of a week, that for many, couldn’t end sooner.