We’re starting off this week by sharing two recent blogs from Dennehy Wealth. The first is in line with World Mental Health Day which took place yesterday. Despite international awareness improving year on year, it is still a topic that all too many of us brush under the carpet. You can read the blog here to find some simple ways to help you and others.
Next, for those of you worrying about the U.K. Budget (30th October) here is a link to the pre-Budget note from Dennehy Wealth. Spoiler alert - for most people the recommendation is to do nothing pre-Budget which you hadn’t already planned to do in the year or so ahead. [We will be hosting a Q&A with the team shortly after the Budget – look out for details.]
Other than that parochial pre occupation, the big financial issue in the last week has again been China, followed by dwindling hopes for more bumper US rate cuts, and the oil price. In reverse order…
First oil. The price is stirring but little more. With less economic dependence on oil than yester decades, and more than ample supply, don’t buy as a bet on an escalating Near East conflict. Nonetheless, you might buy energy funds taking a longer term perspective because oil stocks are very cheap, pay decent dividends, and the need for fossil fuels for many years ahead is probably being underestimated.
Secondly US rate cuts. “US jobs boom kills off hopes of mega rate cut”, was one headline last week. Because some job numbers are produced weekly, expectations do bounce around. But, on balance, a recession is not in sight, and further US rate cuts of consequence do not appear to be justified. This removes one of the planks for US stock market bulls, nonetheless they are not running scared - pausing for thought perhaps, but not more - not yet.
Now China. Last week I highlighted that with the average weekly stock market return being less than 0.2% per week, if you can make 10% in a week or 20% in a month it is a huge uplift on that average. And in the prior two weeks, particularly in the deep dive in China on 27th September, the point was made that:
“In the early stage of the new bull market, you do need to take care.
The first wave upwards can be sharp, with substantial gains.
But doubts will remain, and so the early bird investors will be quick to take profits…
So it might make sense to trade this initial uptrend.”
Specifically, for those looking for a stop-profit or target, it said “resistance for the first wave up is at about 4200 on the CSI 300 index, which is about 18% above today’s level.”
And so it transpired on Tuesday and Wednesday this week. The CSI 300 was just above 4200 and then plunged. Just a week ago the headlines were “China’s biggest daily gain since 2008”, and then with a shuddering hand brake turn “Chinese stocks suffer worst falls in 27 years”.
You will already have read lots of rationalisation as to why this happened. Yet it was straightforward and easily anticipated, as set out above – doubts remained, so early birds took quick profits.
I don’t bang on about this because I am a Chinese obsessive, nor because I believe you should massively overweight it in your portfolios – on the contrary.
It is simply that China presents a great opportunity for those of you keen on keeping building your practical experience, in this case manoeuvring around the beginning of a potentially huge new bull market. At some point I will try and pull together in one place all of the elements identified over the last three weeks in this note. But time is pressing, so this is where we are today…
Following the falls earlier this week, the Chinese authorities announced two new positive surprises. The first was the early implementation of a swap facility worth USD70 billion. In a nutshell, financial institutions can swap their poor liquidity assets for cash, provided it is invested into China’s stock market.
The second surprise was the announcement of a Ministry of Finance press conference on Saturday (tomorrow) with details of the new fiscal stimulus plan, where the lack of detail in recent weeks had fed the doubters. No one knows precisely what to expect, but by having it when markets are closed on a weekend is extremely unusual. Sharp moves up or down on Monday will certainly not be a surprise.
China doesn’t need to solve all of its problems at once. That is not possible. What is possible is for the authorities to display a determination to tackle these issues, and one way to do this is to persistently do more than people expect. We will see.
In Elliott Wave terms, wave 1 is over and wave 2 is now under way - they are typically sharp, and often prolonged relative to the time it took w1 to unfold. Wave 2 might not yet be over, but when it is we get to the real excitement, wave 3, when even the doubters start getting on board and drive the market much higher.
Looking back over the week, and putting China to one side, it was the horribly expensive tech-focussed NASDAQ and cheap Nikkei which starred, both up over 2%. The S&P 500 went up along with the NASDAQ, and is currently holding above the 5744 level which I thought might be troublesome – that worry can be written off if we get through October without moving sharply lower.
The rest of the world was rather dull, with the UK still drifting ahead of the Budget. Commodities came off in sympathy with China, oil was surprisingly little moved, and gold steady.
Wishing you all a good weekend, and make sure you take time for you.