Last week, we floated the idea that volatility equals opportunity.
I sent out three buy alerts to my subscribers to put this sentiment into action.
Overnight, the Dow Jones has rallied 2% and oil 4%.
This should lift the Aussie market up today too.
Now we see whether stocks can resume their upward march…or not.
It was ugly action across the small-cap sector yesterday.
They have come under considerable pressure lately.
An old colleague of mine used to write about ‘small-caps’. I remember once he talked about a ‘silent’ crash in the sector.
It’s silent because you don’t tend to hear about these downturns in the mainstream press.
And the indices — like the ASX 200 — don’t capture it either. I don’t think the small-cap index even captures it.
But I can see it playing out in front of me.
Is this a leading indicator for the stock market in general?
2022 is looking decidedly murky right now.
We know the big themes pressing upon valuations and sentiment — rising rates and COVID.
And markets may yet climb these worries.
Is there another surprise lurking that none of us are considering?
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Here’s how I deal with this: I focus on individual stocks and what can move them.
Picking the driving force behind the market is too hard, too variable, and too prone for error in my book.
That’s why I called my service Catalyst Trader. I find something unique to each individual stock that can get it moving. The idea is not to rely on a rising market.
However, positive market sentiment is a big help, and we don’t have that currently.
So much depends on time frame, too.
I was emailing a US colleague this morning. Part of his remit is to find income opportunities for US investors.
I told him that Australia had had zero rates for a lot less than the US. There are still big yields on offer out here.
It wouldn’t surprise me in the slightest to see foreign capital bid on these assets.
Take a look at the Aussie dollar right now. It’s down to 70 US cents.
This gives American investors big buying power out here. And they might even get a kick from the Aussie dollar in the next few years.
After all, Australia is running trade and a current account surplus right now.
The outlook for commodities is good with the push for decarbonisation and renewables happening.
Commodities — and commodity currencies — can be viewed as inflation hedges too.
The nitty-gritty, of course, is what’s going to happen in China.
‘China’s central bank said on Monday it would cut the amount of cash that banks must hold in reserve, its second such move this year, releasing 1.2 trillion yuan ($188 billion) in long-term liquidity to bolster slowing economic growth.’
One thing I pointed out to you recently was the ‘relative strength’ of the big iron ore miners on the ASX.
I’d hazard a guess that the market was pricing in this response from the Chinese central bank.
Keep an eye on how they move from here.
Iron ore at US$100 a tonne still offers them very good cash flows and margins. Any move higher would be more cream too.
And US dollar earnings are a good thing currently, with the Aussie dollar being so weak.
Watch the market carefully from here. If we’re going to get a Santa rally, it needs to start now.
Editor, The Daily Reckoning Australia
PS: Don’t forget the cause close to my heart. My nephew Ned has a horrible condition called cystic fibrosis.
Every Christmas, the CF charity does a fundraiser called ‘Sock it to CF’. You grab a pair to help raise money for them. Get the Christmas feeling going and give it a go!
You can see all the socks here.