The hawkish pause by the US Fed during the week has shaken things up.
Could it be true that the stock market is actually going to move?
I won’t count my chickens yet, but there are a few dominoes lined up that could see a sharp move to the downside unfold in the S&P 500, Nasdaq and ASX 200 over the next month or so.
The ASX 200 may not have budged all year due to safe haven buying in the top 50 stocks (ex-property), but a quick look under the hood makes it clear that many stocks have blown a gasket.
After two years of steady selling pressure in the mid-, small- and microcap space, I reckon we are entering the final capitulation phase where punch drunk investors sell stocks at any price just to get out and end the pain.
US 10-year bond yields have broken out to 15-year highs on the back of the Feds hawkishness and Japanese 10-year bonds are starting to see some serious selling pressure as the BOJ readies the market for a change of tack.
As real yields continue to rise, the S&P 500 will have a hard time holding near the all-time high. Especially if the rising rates cause something such as commercial real estate to crack.
If we do see another wave lower in US stocks, the Australian small- and microcap sector will see more selling pressure, but it is now getting to the point where many of them can’t go much lower unless they are about to hit zero.
It is rare to see such an immense clear out of positions across the board like this, and I’m sure many investors in the risky end will swear off it for life as a result of the losses incurred over the last couple of years.
But among the rubble there are going to be stocks that survive the bear market and bounce back. When a stock has fallen from $1.00 to 3 cents, if it survives it can jump to 10 cents on the initial wave higher. That can be a pretty quick 300% gain…you basically have to risk your dough to find out.
I’m especially interested in stocks that will benefit from the coming energy transition, because that is one market theme that ain’t dead. The bargains on offer in that space are starting to look so tempting that I reckon plonking some cash in a few without a stop loss and hoping for the best is the way to go.
Not today, but if we see another wave down in markets unfold as I suspect…that time could be approaching.
Check out the Closing Bell video above where I show you why I think the S&P 500 could be close to a 9% fall and where the ASX 200 would drop to if that happens.
I also have a look at the S&P/ASX Small-Cap Index [ASX:XSO] and explain why another wave down will take prices into a major buy zone.
You will also see a stock that is in the Fat Tail Microcaps portfolio — the most exclusive advisory service we offer here at Fat Tail — and why I think it is starting to look pretty damn cheap.
Until next week,
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Murray Dawes,
Editor, Money Weekend
