If you ever needed convincing why you should always have one eye on the chart of any stock you own, consider this.
The Financial Times reports that two former executives of Anglo Irish Bank have been convicted of conspiracy to mislead investors, after the longest criminal trial in Irish history.
Anglo Irish collapsed in 2008 alongside the rest of the Irish economy. But what’s amazing is the scale of what happened.
The FT reports the two were on a charge of, ‘arranging a €7.2 billion financial transaction that disguised the real state of health in Anglo in the months before it collapsed’.
The Irish Times says the men involved were trying to boost the company’s balance sheet before it was due to report its accounts in September 2008. The bank was bleeding deposits at the time.
Take behaviour like that as a lesson in why it always pays to ask yourself a few questions when you see a stock in a clear downtrend on a chart. Why are people selling? Do they know something you don’t?
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Making sense of conflicting signals
Of course, it wouldn’t be the market if it wasn’t flashing conflicting signals and leaving doubt in your mind no matter what you do.
On one hand the economic news keeps rolling in and generally surprising to the upside. But the fear from 2008 lingers for some, like a cold sweat.
Last Wednesday The Sydney Morning Herald cited a portfolio manager from Katana Asset Management who said there’s currently a common theme among fund managers.
That’s their high weighting to cash. That’s despite the low interest rates increasingly making this a tricky position to hold. It’s tricky because cash generates you no return after inflation.
Of course, you can see why they’re holding cash in one sense, because you don’t have to look very far to see all the reasons for worry. And even if you couldn’t see them, plenty of people are happy to point them out to you.
Take your pick: the Fed raising rates, the UK ‘Brexit’ debate, Chinese debts.
But then again, there’s always something to stress about in markets. Hence the expression that ‘bull markets climb a wall of worry’.
As far as right now is concerned, you and I can take these high cash holdings with some comfort.
The chance of a major stock collapse is most unlikely while there is so much cash out of the market. Any lows in stocks will most likely draw this money off the sidelines.
You don’t have to believe me on that. High profile investor Geoff Wilson said it himself this week. He’s looking to take advantage of any weakness in the market to snap up shares he wants to own for his new large-cap fund. He won’t be alone.
The market is likely to give him an opportunity in June. Australian stocks generally take a dip this month.
That’s because selling pressure comes in from investors via tax loss selling as they write off their dud investments. Watch out if you have any weak stocks in your portfolio. They’re unlikely to turn around any time soon.
The US economy is looking strong
Of course, in general the Aussie stock market takes it lead off the US.
But the same dynamic cannot be said to be at play for the US, however. Their tax year is different. But what isn’t different is the perception that the stock market is somehow on borrowed time.
And yet for all the worries we keep hearing, US stocks are trading a whisker under their all-time highs.
They’re doing so even though investors appear to be pulling money out of stocks around the world. The Financial Times reported this week that US$100 billion has been withdrawn from equity funds worldwide over the past year.
Currently global equity markets have lost money to outflows for seven consecutive weeks. Unfortunately, the report on the data doesn’t tell us which countries are the most affected.
But it does indicate investor psychology. There’s another way we can gauge that, too. Apparently Exchange Traded Funds that promise low volatility have had a staggering US$10 billion come under management in one year in the United States.
It doesn’t take much to speculate that investors want to get exposure to the capital growth and yield that shares offer, but are worried about losing what they have.
This week the US central bank the Fed said it’s now seeing rising wages right across the US.
Granted, the Fed is almost always behind the ball on these things. As a consequence, interest rates have been kept too low for too long.
But a strong housing market and strong employment paints a good picture of the US. That doesn’t mean 2016 won’t be volatile. It most likely will be. But that will give you a chance to take advantage of it and buy stocks you want to own. After all, that’s what the fund managers will be doing.
Editor, Cycles, Trends and Forecasts
Ed Note: This article was originally published in Money Morning.