Sharemarket Delivers Another Bear Market 'Dead Cat Bounce'

By Rod North. Published at Mar 18, 2020, in Features

The Australian sharemarket yesterday delivered yet another Bear Market ‘Dead Cat Bounce’ on the Australian Bourse with the All Ordinaries Index finishing up 274.60 points (5.43%) to 5,332.80.

This means that the market is now down 26.12% from its all time peak of 7,225.2 reached on 20 February 2020.

The market seems to have some résistance around the 5,000 level but that is likely to be short lived.

The Facts are:

  • We are now in sustained ‘Bear Market’ territory.
  • We don’t know at this stage, how long the ‘Bear Market’ will last but we are likely to see an overall decline in the market of around 40% before we start to see the rebuilding and recovery process in the weeks and months ahead.
  • The President of the US has now publicly stated this week that the US could go into a recession. This doesn’t help us at all on the uncertainty stakes. The President also described COVID-19 as a bad cold initially before then declaring a State of Emergency in the US. Go figure!
  • China could technically be in a recession following what is rumoured to have been a weak March quarter , then coupled with the June quarter likely to follow suite and deliver a further negative figure.
  • The Australian Prime Minister and his Cabinet could seriously be facing a recession in Australia, the first for 29 years (1991) as it looks pretty clear that the March quarter will be a negative figure and the only hope to avert a negative June quarter is to substantially increase the Government stimulus, coupled with a further drop by the RBA of the cash rate, QE and the banks potentially giving mortgagees an embargoed period of three months on their customer mortgages.
  • The good news is that this could be a relatively short lived ‘Bear Market’ depending on if an when the COVID-19 pandemic is contained and a vaccine is found. We are still a long way from reaching that point in Australia.
  • We should have learnt lessons from our neighbours in Asia about how they dealt with the earlier bird flu and SARS pandemics.
  • The sharemarket will go lower before we see the bottom of the market. More likely, we will see an All Ordinaries of 4,600 to 4,800 before we reach the bottom in this ‘new cycle’ of the market.
  • The coronavirus pandemic is still continuing to evolve and that creates a very high level of uncertainty that creates extreme volatility. Markets don’t like uncertainty in any circumstances and are more likely to go down to lower levels on further bad news until we turn the corner.
  • Fund Managers and professional investors will be using this substantial decline in the market now to purchase undervalued shares that can recover earning quickly when the market eventually returns.
  • From and investment point of view more money can be made by cleverly investing around the bottom of a sharemarket than the top. Remember March 2009 , when the All Ordinaries Index bottomed at an all time low in that cycle of 3,109.

The best advice given by my father who was a stockbroker for many years was: “Keep your head, whilst all around lose theirs.”

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