Passive Investing’s Reckoning Approaches

About the only thing I know about markets at the moment is that if they are down heavily one day, they’ll probably be up the next.

There’s plenty of uncertainty around as we await the elusive deal between Iran and the US. The CGT and negative gearing changes are also causing plenty of angst.

The way I see it, the only thing holding up the S&P/ASX 200 [ASX:XJO] at the moment is the banks (with BHP and Rio chipping in).

Charlie and I lift the lid on the ASX 200 and show you the serious bloodletting underway.

Former market darlings are getting thumped. I reckon there are many fund managers who wake up every morning with heart palpitations, wondering which one will be next.

But are there great opportunities out there, too?

I reckon the best trades occur when a paradigm shifts.

When the rules of the game change, you need to think through the repercussions and figure out what is currently mispriced under the new paradigm.

The banks are a glaring example.

We all know they are massively overvalued due to passive investing. The new tax rules will see investor demand drop off, and investor loans have the highest profit margins for the banks.

Clearance rates have been dropping like a stone over the last few weeks. Many houses are being withdrawn before going to auction.

The road ahead for residential property doesn’t look bright. And banks are priced for perfection. Do the maths.

Getting short the banks is a tricky proposition for most punters.

Unless you are trading CFDs or have access to option trading, of course.

If the banks do see a serious fall, the index won’t escape the carnage. So perhaps a short ASX ETF as a hedge on current open positions could make sense.

The ASX 200 remains 3–4% above major support around 8,300-8,400. If that level can’t hold, then odds increase that we see a bigger clear-out than many expect.

But if those levels hold, we remain stuck in the range of the past year, and that could continue for many months yet.

Resolution of the Iran war could change the picture, with relief buying a possibility that could turn the short-term bearish situation bullish.

So all things are on the table at the moment, and it’s no wonder markets are down one day and up the next.

I am leaning bearish and have my eye on the banks, wondering when they will crack.

Charlie and I unravel what we are seeing in markets at the moment, and be sure to check out Charlie’s new trading service called ATLAS.

It’s an AI engine that scans the small end of the markets for trading opportunities, one of the few places of green this week.

To see it running, click here to view his demo and presentation.

Closing Bell