Will market volatility soon be over?
The market has been on a roller coaster ride over the past three weeks - up one second and down the next. Unfortunately, this recent volatility has left many investors fearful as they struggle to work out if the market is going to fall heavily.
However, it is likely that the current volatility will finish in the next few days and the market will return to a bullish state, in which case investors need to determine not what direction the market is heading right now, but rather what their strategy is to manage it.
There is an old saying that a calm sea never makes for a skilled sailor. We know that anyone can make money in a strong bull market, however, successful traders know how to trade any market under any condition because they have taken the time to educate themselves and master their skills.
Every year the market experiences periods of heightened volatility. During these times it is not uncommon to see the market over react to news of the the moment. An educated investor understands this and does not react on speculation, rather they follow a well thought out plan as they understand that the market is largely predictable. They also understand that the market moves in a particular direction with momentum, therefore, they largely ignore the short-term volatility.
So what caused the current volatility in the market?
Following news in the US that the Federal Reserve Bank (Fed) was closer to a neutral rate, which neither stimulates nor slows down the economy, the S&P500 traded up strongly. Speculators reacted to the news believing that this could potentially be the end of the banks quantitative tightening cycle.
We also know the Fed is likely to raise interest rates several times in 2019. This saw the US treasury bonds two and five-year curves invert, which is a typical warning sign of a recession although there are no other signs that this is likely to occur.
Despite this, many investors in the US exited the market, which had a flow on effect in Australia.
In the past week it has been a tale of two parts bullish and one part bearish as Energy, Utilities, Communications services and Consumer staples at the time of writing had all moved up by around 2 per cent while the Financials, Information Technology and Consumer Discretionary sectors fell by around 2 per cent. Standout stocks for the week have been property with Stockland, Scentre Group and Mirvac all trading up by around 5 per cent, while banks and insurance fell with ANZ and QBE being worst hit, down 4 per cent.
So what do we expect in the market?
As mentioned previously, the current volatility is expected to be over any day now, and while it appears that the Australian market is bearish, it could turn bullish over the coming months.
Either way, we will know what direction the market takes very shortly because if the market moves up through 5,900 points in the next few weeks, it will be bullish to the end of the first quarter next year. If the market falls below 5,675 points in the next few weeks, then we can expect further falls.
Remember, it is not what direction the market is heading that is important, it is how you manage your portfolio.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in book stores and online at www.wealthwithin.com.au