The sharemarket and the rabbit-proof fence

Are there boundaries?

Does the sharemarket have any boundaries or fences or do prices just keep going in one direction?

The sharemarket is a mystical place – we’ve touched on some of the areas in which it exhibits this trait before. However, today we are going to ponder the flights-of-fancy that come with reading charts on various sharemarket performances. Take my word for it, there is a reason that we are doing so at this point of time.

Quick Sharemarket Update

Here are some brief figures for you to digest:

  • The Australian sharemarket is currently 34% below its November 2007 high point (as measured by the S&P/ASX 200 Index). The index must lift 51% to get back to this high point.
  • The United States S&P500 index is currently 18.25% below its 2007 high point. The index must lift 22.3% to return to its previous high point.
  • The Australian sharemarket has fallen 9% since the 11th April this year – in pretty much a straight line.
  • There are many people predicting that the market will go considerably lower, and many professing to know which way it is going.

If you have been following the musings of late, you’d be aware that the current, post-GFC world is operating in a TRADING manner. In other words, time-frames have been shortened, and many people are only looking at the sharemarket as a place to ‘punt’ on making a quick profit. Any attempt to interpret moves in markets in this environment needs to be understood in light of this fundamental assumption.

In other words, there are any number of issues currently raised as reasons for the recent drop in shareprices:

  • The ‘Euro debt crisis’. Will Greece default (it’s hard not to when the definition of ‘default’ extends to include renegotiating the term of the loans)? Will Ireland need more money? Will Spain follow Portugal, Ireland and Greece in asking for help? Will the European Central Bank be forced to take on even more ‘toxic debt’ instruments to provide support to these and other countries? Will private investors be asked to take cuts in their capital to share the pain of a renegotiation of Greek debt?
  • China is headed for a ‘slowdown’. Will the Chinese government be able to cut its growth from 10% to 8% without triggering a recession? I’m making up the growth figures – predominantly because the actual figures seem a bit rubbery and are often revised with the benefit of hindsight, and the key point here is that even the lower growth is likely to see a continued high level of demand for the hard and fluid stuff that Australia digs out of the ground to send over there. The Chinese government has increased reserve requirements and interest rates (Platinum group recently estimated this as a 2% increase once the average discount/premium from benchmark lending rates is applied) and the property market might still hold a big, fat bubble.
  • Profit growth is slowing in many countries. Maybe the recovery will take longer? Maybe there will be a second dip?
  • The United States will stop printing new money. About now, apparently. Mind you, the Federal Reserve bank has already said that it will simply reinvest the dollars that are already out there as they mature, so they aren’t going to reduce the money supply either. This means a continuation of pretty much ‘free money’, which should keep the speculators happily speculating for quite a while yet. You’d have to guess that vested interests would be well placed to make the world look as gloomy as possible in an effort to force the Federal Reserve to print more new money. I’m not suggesting conspiracy theories or anything – but i’m just sayin’… And of course we have the Democrats and Republicans agreeing on only one thing – that they will each do whatever the other doesn’t want them to, so the chances of the United States using its financial might to actually fix its own problems are fairly remote. At the moment, many observers are suggesting that the US is simply exporting inflation and devaluing their own currency to make their problems everyone else’s problem. Again, not pointing fingers but…

All of these points have a core component of validity. The question that is being asked by all the argy-bargy horsetrading going on at the moment is whether or not these possibilities have been priced into the current market levels? This is the position of a trader – someone who is looking to get into the market and out again with the maximum profit for the least risk. Which is kindof a non sequitur – because trying to implement a short term capital trading position is by definition, risky.

So why the reference to the Rabbit-Proof-Fence? It’s just me trying to be clever. If we look at the sharemarket overall and its level at the moment, we can see that it is in a definite downward trajectory. Problem is, it looks like there is no end to this particular down, doesn’t it?

S&P/ASX 200 Index priced daily

The current trend looks rather ominous... especially if your history only goes back a little while

Well, i’m going to go out on a limb and say that there is an end, and it is all to do with rabbits. If you’ve been keeping up with the musings you would also know about the famous Fibonacci measurements of sharemarket movements, so-called because the magical number sequences were identified for the European world by a fellow who has become known by that name. Some of his mathematical theory could be used to try to explain the growing population of rabbits… We’re getting tenuous now, aren’t we?

Anyway, there are certain retracement levels that are associated with larger sharemarket movments, and you could apply one of them in a very non-technical way, to show that we are right at a crucial support level for share prices at the moment.  “Who cares?” you may say. Well, not a large part of the population actually. And yet these mystical magical sequences are followed by a huge army of people globally, many of whom are quite prepared to put their money on the line as a result of one interpretation or another. If we assume that these dart-board magical charts hold some validity to someone, somewhere and apply a Fibonacci process to the post-GFC market, we come out with a chart that looks something like this…

S&P/ASX 200 chart weekly

If we work from the market 'high' and subsequent 'low' we can see some thresholds that work if we apply Fibonacci thinking

If we all take a deep breath, and assume that i’m even remotely correct then we could ponder the current situation as one in which those very active traders shorting the market are a bit scared to lay the bets on too hard – because a bounce from these levels could be sharp and quick, causing a person who has gone short to lose a lot of money. At the same time, those who want to buy at these levels would be holding back a bit, just in case the crucial threshold is crossed and the next level of ‘support’ is somewhere like 4,000 points or so. So we are left with the bulk of the market movement being provided by folks doing the usual window dressing of their portfolio in preparation for the end of the financial year.

End Result?

A whole heap of nothing, with the overall market being driven by standard buying and selling as individuals around the world make their individual decisions. Where this does potentially count, is in the mindset of those who have investments exposed to the sharemarket, and that is pretty much the bulk of the Australian population (through their superannuation, in one way or another). In times such as these it is easy to become weary of the volatility and uncertainty of listed markets, and to feel the siren-call of moving into cash or term deposits for the relative tranquility and peace of mind on offer. No problems with this, if that is what your situation calls for. However, if your situation suggests that exposure to growth style assets is appropriate (remembering that this site does not proffer to provide personal advice, you can only get that from an appropriately qualified person making appropriate investigations into the appropriate position for your financial stuff) then you do need to ask yourself about just what you are trying to achieve?

Are you trying to time markets, and move in or out as your fears determine? Are you going to be happy with just the market rate of return – whatever that turns out to be? Remembering that the market values shown above aren’t that much different from where they were in 2006…

In other words, this is a time to reconsider your objectives, and to make decisions in light of your overall objectives – it’s a very dangerous time to be making market timing calls one way or another, as the tea-leaf forecasters could be predicting anything from boom to gloom right now, and if you make decisions based on either of these then it’d be a great idea to have all the facts in front of you first.

And my call?

OK. This is just for fun. I have no more inside information or ideas than the average genius in financial markets (come on, allow me a little bit of rhetorical fun…) but on the current mix of markets and economics, i’d be forecasting a bounce up from these levels and a gradual improvement in ‘mood’ overall as the year wears on. However, with all the pent up fear and worry in the world, and the tendency for rabbit fence thresholds to somehow impact on the real world of money, i’d tend to have an exit position in place for an short term money. Over the next 3 to 5 years, i expect that there will be some fairly strong ‘re-ratings’ of market prices as the big issues are resolved one after the other – whether positively or negatively.

This is based on the fact that the global financial system almost came unhinged a few years back – but didn’t –  and that even though there are many areas that are yet to be ironed out properly (think deficit/surplus problems, Australia’s property price bubble, the gold price bubble, the US debt problems, the crazy mix that is the EU common currency, Chinese currency stability and a few others besides…), the current Australian sharemarket is priced at what is historically a fairly reasonable multiple of forecast earnings. There are all sorts of arguments against my statements but not the time here to bore you with them all. Let’s just say that the market looks like it is at a watershed moment to me, and it will be interesting to see where it goes from here.


All the usual disclaimers – you’d be slightly unhinged and just a little bit crazy to use any of this post as a basis for action in your own finances. The comments being made are extremely broad, and are considering the market as a whole, which varies almost completely from most people’s exposure to those markets. None of this post can be considered personal advice, as that can only be provided by an (this bores me to tears… but let’s get it over with.. actually, it’s a bit like the policeman reading out the bad-guys’ rights on a television series – they only start the first line and our minds automatically fill in the rest  or tune out completely) appropriately qualified person after making appropriate investigation into your current financial position, objectives and attitudes to risk in light of the current mix of geopolitical, financial and economic issues. Actually, i might just do a post on disclaimers…

Feel free to comment or criticise. It’s not my habit to suggest the market is here or there or to make calls for future movements, in the shorter term especially – but the level of myopic commentary in media and markets has reached a crescendo that just has to be addressed. Even if only in my little way.


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