FYI | Oct 12 2016
By Peter Switzer, Switzer Super Report
I got a really good but really hard question from someone during our monthly webinar last Friday. The online attendee asked Paul Rickard and myself if the pending run of potential stock market disruptors that we made reference to creates the opportunity to sell now and wait for the sell off, so she could get back in at the low, whenever it shows up.
This is a hard question that most long-term investors might think about without taking action but it’s something that short-term traders are always pondering and acting upon.
Before looking at possible strategies, let’s run through what could be the curve balls that could hit stocks out of the park in a negative direction.
First, locally, it could be the inflation figure on October 26. If this is a very low number, it could lead to speculation of a rate cut on Cup Day, which could help dollar-sensitive stocks in particular. However, if the inflation reading is higher than 1%, it could lead to the conclusion that rate cuts are over and that could work against interest-rate sensitive stocks.
(This is a low order concern and less likely to really hit our market significantly.)
Second, the US election could help or hurt stocks. The New York Times election poll has Clinton at 45% versus Trump at 41% but three days ago, the International Business Times in the UK had Trump ahead in two out of three polls they’d surveyed, including the Rasmussen Reports White House Watch telephone and online survey on October 6.
If Trump wins, or looks like he will ahead of the election, there could be a pre-poll sell off but if he looks like a loser before voting and he does a Brexit-style come from behind win, then stocks could really go south.
Third, US earnings season kicks off with Alcoa first out of the blocks. Third quarter earnings for S&P 500 companies are expected to be down 1.5% from a year ago but they are expected to be up slightly on the June quarter, continuing an earnings recovery that has been helped by a stabilization in the US dollar and rising trend in the oil price.
Clearly, better than expected reporting over the next few weeks could take stocks higher before the US election and a Hillary win could keep the upward momentum flowing, but Donald could stop it in its tracks. I think US reporting will be good so I wouldn’t be an early seller, if I wanted to play this game. In fact, I’d watch the polls and earnings before I took action.
Fourth, there is a follow up OPEC meeting in November, after the US election, which could help or hurt stocks. I suspect if financial markets are spooked after the Americans vote, then the oil ministers could be wise enough not to make the economic lives of their customers any worse by sinking the oil price and consequently stock markets. However, if Hillary wins and stocks are buoyant, then self-interest could prevail at the oil meeting and something annoying could result. I’m gambling against a bad oil result for stocks, as too many of these oil producers are in fiscal trouble, even the Saudis!
Fifth, there’s the Italian referendum on December 4. If the populace votes no to constitutional reform, there could be some EU survival questions raised. This is a long shot issue and I’m not worried about it but I was relaxed about Brexit until reality had a big bite! This is not an exit vote but the PM Matteo Renzi has said he’d resign if the country votes no, so it could destabilize financial markets.
Finally, there’s the much-expected December interest rate rise in the US. As it’s expected a stock market sell off before the event is very likely, we could see a “sell the rumour buy the fact” scenario playing out.
I have always warned of a sell off of some kind was on the cards before a good finish for stocks this year. When that will happen is a very tricky piece of timing to predict. The six possible negative events listed above show how hard it will be to time a get out and get in play, so taking out an option on an index sell off could be worth thinking about for someone like my webinar attendee. Also you could buy an ETF that bets on a correction of the index (for example, Betashares BEAR)
Personally, I’m going to roll with the punches betting on a Hillary win (but she’s a worry), a positive US earnings season, good sense at the oil meeting, a manageable Italian referendum result and a not-too-market-dramatic December rate rise from the Fed in the context of an optimistic outlook for the US economy.
I suspect a small sell off is possible but then I might buy some units in an ETF based on the S&P/ASX 200 index because I think the index will see 6000 in 2017 and I’m not ruling out 7000 over the next few years.
Last week, Morgan Stanley tipped the index would be a 5200 in 12 months’ time while Citi said it would be at 6000 by the end of 2017. Meanwhile, IBISWorld’s Phil Ruthven said he thought we’d see 7000 before the decade was up. And he’s a good tipster.
For at least three years, I’ve been supporting the view that we are in a long, grinding higher cycle. While I could change my mind on when the end will happen, for now I can see stocks heading up, in net terms, so if I miss any interim sell-offs, I will be a buyer at lower levels.
Anyone wanting to sell and buy has two big events to time — the US election and the Fed rate rise — but as I have shown above, it’s not an easy game to play. Good luck if you’re going to give it a go.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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