How do you tell the difference between a healthy share market correction and a plunge that heralds the end of a long bull market?
The answer is that you can’t except with the luxury of hindsight, which is of precious little help if you are trying to decide whether to buy, sell or head for the hills at the moment.
With the US market now in solid correction territory – which is defined as a ten per cent fall from its heights – and the Australian market not too far behind despite showing some independent resilience on Friday, the absolute truth is that anyone who tells you they know what the market is going to do from here on is a dangerous phoney.
You can make all sorts of predictions based on charts, history, fundamentals and even the weather for that matter but in the end it is just an opinion like any other opinion.
My best guess is that after a long period of rising share markets we are seeing the start of a much more volatile outlook, with wild swings in both directions as the bulls and bears wrestle for control.
But it is important to realise that I could well be absolutely wrong – this could be a pause that refreshes and markets could go on to record repeated fresh highs or we could be at the beginning of a grinding bear market in which the old habit of buying the dips only produces further losses.
Time to re-evaluate
What it is important to realise is that when you have days like Thursday when the Dow Jones drops more than 4 per cent, there is a new dynamic at work and it is a great time to re-evaluate everything from asset allocation and risk through to rebalancing and offshore exposure.
Business as usual is not an option, even if you have been sitting on cash and waiting for an opportunity or have been investing in shares for capital growth with your ears pinned back.
Even basic passive investors will be changing things at the moment – most likely buying some more shares when they hit their rebalancing date to bring their pre-determined asset allocations into line with a new reality of lower share prices.
Bond market is worth keeping an eye on
One really interesting aspect of this market correction is the pushing and shoving that is taking place between the bond markets and share markets, particularly in the US.
Yields on US bonds have been rising in anticipation of rising official interest rates this year and it was these movements that fed into the dramatic falls in US stocks and reverberated around the world in other markets.
As yields and interest rates rise, it is only natural that this asset class will begin to attract more money away from shares, particularly as it was ultra-low interest rates that actually triggered the move to share markets in the first place.
Here we run smack bang into the bull and bear cases for equities which I have outlined below and every investor needs to decide where they stand.
Bears think this
The Bear case is that share valuations have risen too high and for much too long, with most stocks trading at higher multiples of profit than the long term averages.
That is a sure sign that euphoria has crept into the market, which will now normalise back to lower levels as investors finally see sense.
Bears see strengthening economies around the world as a sign that inflation will spike and cause official interest rate rises that will slow the economy and potentially cause a recession ad also raise borrowing costs for businesses and consumers and increase the incentive to invest in absolutely safe term deposits rather than taking a risk with shares.
Bulls think this
Bulls believe this correction is a refreshing pause that will see markets run higher once this bout of negativity is out of the way.
They point to the strong economy as the driving force, with higher profits coming through and more than justifying current company valuations and forcing price earnings ratios down much closer to their long run averages.
With consumer confidence high and corporate profit and dividends rising faster than expected, it is only natural for share markets to continue to rise.
This is particularly the case in Australia, where the share market has not run nearly as hard as it has overseas.
Profit results this week
While fundamentals are taking a back seat due to roiling and see-sawing markets, this week sees a continuations of profit reports from Australian companies big and small.
Some of the more notable ones include Amcor, Ansell, Bendigo & Adelaide Bank, JB Hi-Fi, Boral, Challenger, Cochlear, Computershare, CSL, Dexus Group, Domino’s Pizza Enterprises, Insurance Australia Group, Woodside Petroleum, ASX Ltd, Newcrest, Origin Energy, Telstra, Medibank, Sims Metal, Star Entertainment and Village Roadshow.
ASX small cap stocks this week
Whilst there was plenty of blood on the streets this week in the market, there was also some stocks that stood out.
Carnegie Clean Energy (ASX: CCE)
Renewable energy developer Carnegie Clean Energy received an operational boost in the form of a $6.8 million contract from Western Power, a Western Australian state government-owned energy supplier, to build a 5MW Battery Energy Storage System (BESS) facility in Kalbarri, Western Australia.
BESS will integrate with wind, solar and the grid at Kalbarri to form the largest microgrid in WA, with construction of the project scheduled to begin late-2018 and commence operation in mid-2019.
Carnegie Clean Energy CEO Dr Michael Ottaviano believes the awarding of this project demonstrates the company’s capability to deliver innovative utility-scale solar and microgrid solutions across Australia.
WPG Resources (ASX: WPG)
South Australia focused WPG Resources has struck a whopping 607.75 grams per tonne gold from infill drilling at its Perseverance pit, part of the company’s Tarcoola Gold Project which was acquired in May 2014.
The majority of intersections from the drilling graded over 10g/t gold, with the Perseverance pit set to be mined beginning this month through to June.
MMJ PhytoTech (ASX: MMJ)
MMJ PhytoTech reported this week that Harvest One (TSX-V: HVST), which owns 53,333,333 MMJ shares, plans to boost its cannabis flower production 250% by the end of 2019, through its wholly owned horticultural subsidiary United Greeneries.
United Greeneries’ expansion is targeting 20,000kg of dried cannabis flower capacity by the end of 2018 and 70,000kg dried flower capacity by the end of 2019 – which is anticipated to be fully-funded by Harvest One’s existing cash position of approximately C$80 million.
American Patriot Oil & Gas (ASX: AOW)
American Patriot has signed a purchase and sale agreement pertaining to its acquisition of conventional oil and gas assets in East Texas, with the transaction expected to close within 40 days.
This agreement follows on from a letter of intent signed back in November and comprises of more than 38 wells producing 37 barrels oil per day and 440,000 cubic feet per day of gas in the Harrison, Gregg, Rusk and Upshur counties.
According to American Patriot, the majority of due diligence has been completed, including an independent reserve report, full engineering study and environmental assessment, with just land title work to be finalised.
The assets which were acquired for US$2.5 million and are estimated to have the potential to generate more than US$22 million in revenue over a period of time, contain proven oil and gas reserves of 1 million barrels of oil equivalent.
Animoca Brands (ASX: AB1)
Stringing together a stream of news flow over recent weeks is games developer Animoca Brands, this week was no different.
Animoca announced it will be acquiring Finnish gaming company Tribeflame and its subsidiary Benji Bananas Oy, giving Animoca full ownership of all Tribeflame and Benji Bananas mobile applications and games including Racecar, Tropical Resort, Benji Bananas, Benji Bananas Adventures, Waypoint Warriors, and many others.
The Benji Bananas game has been downloaded over 107 million times and earned an estimated €2.25 million in gross revenues since its launch in 2013.
News this week follows on from recent announcements by Animoca that it will be involved in the development of a MasterChef gaming app and the successful launch of it Crazy Defense Heroes game, which is being systematically rolled out in a phased manner.
Northern Cobalt (ASX: N27)
Northern Cobalt has completed its acquisition of nine lithium tenements in the Northern Territory’s Arunta region, with exploration planned to kick-off next week.
In addition to lithium, the Arunta tenements are believed prospective for caesium, tantalum, rare earths, copper and cobalt.
The Arunta tenement acquisition follows Northern Cobalt’s attainment of five tenements surrounding its flagship Wollogorang project late last month.
In a recent interview, managing director Michael Schwarz stated that the company sees the renewable energy sector as a growth industry for the future that will require a steady supply of battery metals which Northern Cobalt will target.
With the majority of the world’s cobalt supply coming out of the troubled Democratic Republic of Congo (DRC), companies such as Tesla and Apple, along with investors, are seeking opportunities elsewhere to source the strategic metal.
Particularly since the DRC changed its mining laws last week which now sees miners operating in the region facing increased taxes and restrictions.
The week ahead
Locally the January job report and estimates of business and consumer confidence are the key releases while it will be useful to watch out for any monetary policy updates from Reserve Bank Governor Philip Lowe when he appears before the House of Representatives’ Standing Committee on Economics on Friday.
Offshore, US inflation data, retail sales, industrial production and housing starts will be released and will feed into the bull and bear cases outlined above.