Stock Market Trap Set — Could there be Another Market Crash?

Oh, what a web the market weaves.

Look around you: doesn’t everything and everybody feel a little too comfortable?

There could be a short-term trap brewing here.

Why so?

Call it instinct if you like.

I follow a lot of stocks, each and every day. The price action in the market is telling me to be a little cautious right now.

And yet if you take your cue off the mainstream press, you’d feel a lot better about the stock market.

The front page of today’s Australian Financial Review says that…

‘China will anchor an Asia-wide economic recovery this year…Market economists are counting on Chinese growth to exceed 8 percent in 2021.’

The ABC describes economist Chris Richardson as…

‘[U]pbeat about 2021 — so much so, his business outlook for the year is: “We got this”.’

Even value fund manager Roger Montgomery wrote at the end of last year that he thinks that the stock market will boom in 2021.

All may be well with these forecasts and thoughts. But right now the market doesn’t seem quite so sanguine.

So much of the bullish flavours to these predictions can be assumed to be in the price already.

Why do you think the stock market roared back so fast after the COVID collapse?

Please. I’m no permabear. But a fast and spooky decline right now wouldn’t surprise me in the slightest.

Discover the three steps you could take today to ‘recession-proof’ your wealth. Download your free report now.

What to Do if there is Another Market Crash

What to do? Easy! Make sure you have your shopping list up to date to bag any bargains should they appear.

Perhaps be a little cautious until the market decides to go one way or another.

It can be OK to do nothing. I told you yesterday that I’ve been tempted to nibble at gold stocks for quite some time.

But something — instinct again — has kept me on the sidelines.

Gold stocks continue to look weak in Australia…and some are down 30–40%.

Let’s take a look at GDX. This is the US fund that invests in gold stocks.

It takes away the Aussie dollar movements that influence the local price for us here in Australia.

Clearly it is in a broad downtrend since the peak last August…

Source: Optuma [Click to open in a new window]

Why bring it up?

Part of the argument for gold is the same as the stock market: Central bank money printing, low interest rates and excessive debt.

And yet the market is pricing in a low gold price regardless in the short term.

I’m not dismissing holding physical gold or downplaying its long-term potential.

I’m trying to suggest that what’s afflicting gold could soon rub off on stocks.

Granted — stocks pay dividends and generate earnings. They are certainly not the same.

But occasionally different asset markets correlate. Gold and stocks fell and rose in step over 2020.

Gold is now lagging. Is this an indicator of brewing trouble for the stock market, the sign of a potential crash?

I think it might be.

So much depends on your time frame here. If you’re holding indefinitely, then a sell-off in January 2020 may not matter much when you look back in 2025.

But if you’re looking for short-term moves to trade, or considering establishing a large position now, this is worth thinking about.

It was the ‘reflation’ trade that drove everything up in 2020.

That can only run so far before the market has to see whether that has come to fruition.

Take Qantas for example. Management tell us they assumed international travel would be back by the middle of this year. Now reports surface that Aussies will unlikely travel internationally until 2022.

Six months may not seem that much in the grand sweep of a life.

But back in August last year Qantas was losing $40 million a week. Every day gone brings more lost revenue and an even more distant return to health.

Vaccines, US stimulus, high iron ore prices and low interest rates are built into the current market structure.

What then can shift it substantially higher?

I can’t make a convincing case right now for Aussie stocks as a group.

Don’t get me wrong. There are always individual opportunities, both long and short term.

But so much wealth is tied up in passive ETFs that track the index. They might find themselves going nowhere fast.

Or worse, down. That is the position of my colleague Jim Rickards.

As above, so much of today’s market is built on the idea of recovery. Jim’s not buying that.

That sets up a worrying dynamic where the real world economy doesn’t meet the stock market’s lofty expectations.

They could reprice sharply off that alone.

All this doesn’t mean sell everything today. It means stay prudent.

Jim, for one, has a plan in place to navigate these tricky waters.

Stay tuned for more important updates on this.

Best wishes,

Callum Newman,
Editor, The Daily Reckoning Australia

PS: Australia’s Great COVID Recession — Learn which investments to accumulate and which ones to avoid in order to give you the best chance of preserving your wealth during the recession. Click here to learn more.