You lucky, lucky people

Do you feel lucky? We’re going through one of the most turbulent times in recent market memory and anyone who has any interest in the markets will no doubt be aware that times have been hard! It is the very nature of traders and investors that causes the market’s rise and fall, through the cycles of fear and greed and through the cycle of maximising returns by increasing leverage.

To paraphrase Warren Buffet, it is important to be fearful whilst others are greedy and to be greedy whilst others are fearful. To go even a step further, a good fundamental or technical analyst should feel confident about sitting on the cusp of a very exciting time. If you are savvy enough to pick fundamentally strong companies that offer sustained value and income from dividend streams, you are ready to ride the next bull market. Of course, it is not easy and the better investors will profit and outperform with tested strategies, but fear is high and the time for greed is coming.

One of the main reasons it is difficult to consistently pick share market direction, is that the stock market is mostly a leading indicator to the economic reality. There are many reasons for this, but it is easy to see in the most recent cyclical top.

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Here we are looking at short term interest rates (blue line) from the Australian Interbank market in relation to the top 200 shares on the ASX (green line). The short term cash prices are inverted to give us an idea of how interest rates have changed. Quite clearly it can be seen that there is a fair delay between the top of the ASX 200 and the height of interest rates.

The same is true around the opposite part of the cycle. By the time that improvements in the economy have fed through to reports in the newspapers and popular media, the share market has already bottomed and started to rise.

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Going over a longer period we can make certain assumptions about the length of the average economic period of expansion and the length of the typical contraction. Of course, it is not very often that history will repeat in perfection, but certain generalisations can be made. One definition of a bear market is a fall in asset prices greater than 20%. It is therefore easy enough to identify how many bear markets the Australian economy has experienced since the inception of the ASX 200 in early 1982 and easy to understand that a typical cycle reveals 4-5years of growth followed by 12- 18 months of decline.

From our first chart we can suggest that (although the market has been in decline for around 1 year) the economy has only started to drop off. From the second chart we can see that the share market will bounce long before the economy improves.

So how do we turn this knowledge into dollars? Quite simply, we are (not withstanding more volatility) closer to a share market bottom than the headlines would have us believe. Soon you will have an amazing time to start investing in long term assets such as shares and especially income yielding shares. Of course you need to know what you are doing, and you need to have a solid plan, but, you, you lucky, lucky people, are on the cusp of the next big move up. Get educated now, and take advantage of long term low risk strategies.

Stay Sharp,

John Jeffery