Centro Shares Fall 70%, Lead All Ordinaries to 3% Drop

“Meltdown!” screams the headline of today’s Age. “Reversion to the Mean!” probably wouldn’t sell as many newspapers. So what really happened?

If this were a normal e-letter, we’d tell you that stocks go up over the long term. To buy the dips. To be greedy when others are fearful and fearful when others are greedy.

But we are abnormal here at the Old Hat Factory. So instead of repeating platitudes, we thought we’d put yesterday’s plunge in the ASX in context. Two contexts actually: what the index has done this year and across 200 years of declining commodity prices.

By the way, the sell-off off heavily geared financials with exposure to US consumers will probably continue. But where will it end?

How about we take a look at the market from a technical perspective? Caveat emptor. Technical analysis helps you confirm your fundamental analysis. It’s also a useful timing too. And everyone once in a while you run a chart and then look at it and scratch your chin and say, “Hmmn. That looks interesting.”

Hmmn. That looks interesting.

What’s interesting about the chart is that the All Ords closed smack on the 200-day moving average yesterday at 6,331. An AU$5 billion stock became an AU$1.3 billion stock when Centro (ASX:CER) shares fell over 70%. Was yesterday the big reversal day? If you were a trader, would you buy in the money ASX calls? Or sell puts?

Specifically, the chart shows the All Ordinaries going back two years. Three times since then the index has traded below its 200-day moving average. Only three times. But each time, the pause has refreshed and the index has gone on to higher highs.

The most recent time it returned to the MA it crashed straight on through. You’ll recall that day probably. It was August 16th. In mid-day trading the index formed a “V for Va Va VOOOM” pattern and presto! The downward momentum of the credit crisis was reversed.

Hold your thoughts.

After yesterday’s drop on the ASX we got this warm, clammy feeling of déjà vu. We walked over the window and shut it. Then, a look at the data. One and two percent moves are not that uncommon in the market these days. Financial globalisation has made markets more volatile, not less. But three percent moves are big and less common, statistically speaking.

In the last year, after a quick review of price data, you’ll find no less than eight days where the All Ordinaries fell by 1.90% or more. In fact, only January, April, May, and September avoided a trading day with a one-day decline near two percent.

The market is still up nicely for the year, about 12% even after this month’s stumble. The All Ords would have to lose another 11% or so to finish the year in negative territory. In fact, the market has had only three losing months out of the twelve this year (although December threatens to be the biggest loser yet).

All Ordinaries, 2007

We’ll have our predictions for 2008 next week.

Dan Denning
The Daily Reckoning Australia

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