While our market will generally follow the US, there will be a divergence at times. In the last week in particular, our market has ended the day down despite the US market being up.
There a few things fundamentally different between the US and Australian market at the current time which are likely to be contributing to the recent weakness. These are not all the reasons, just some contributors and are in addition to the ever present fear of another correction.
- End of Financial Year.
- Access to Superannuation
End of Financial Year
First the issue of the end of the financial year. In Australia, the date for the end of the financial year and tax reporting is June 30. The US is different and generally uses 31 December for the end of financial year. So the US does not experience the June 30 movements that can occur here. In the US, June 30 is just another day.
This year we had a huge market drop and a massive loss suffered by many. Although we have had a big recovery, many are still sitting on big losses and there has likely been some selling in the final 2 weeks of June to realise those losses in the 2020 financial year. I wont speculate on how much, suffice to say its highly likely to have occurred.
The drop was then followed by the big rise in the market from March 23 to around mid June. It has been extensively reported of the massive spike in people opening trading accounts and pouring money into the market. Many of these would be sitting on profits and any that wanted to take profits due to the ongoing fear of another drop in the market. This selling would have commenced from July 1 to bring the capital gains into the new tax year. Once again I won’t speculate on the extent of it.
So this year we had both big losses and big gains. Usually it would be more of one than the other. So you would see the majority of tax selling occur either pre June 30 or post July 1. However, this year the selling is likely to have extended from June and through into July.
Access to Superannuation
Second the early access to Superannuation. The second round of the early access to superannuation opened on July 1. As of 29 June, there had been $19.4 billion withdrawn form the first round of super release. There was $7.6 billion of withdrawals in the first 7 days of the second round opening and it is estimated that around $25 billion will be withdrawn under the second round.
That is $25 billion that has come straight out of the market. Even if all the money didn’t come from direct selling by the super funds and they paid from cash reserves, it’s still money that would normally have gone into the market and resulted in less money on the buy side.
Despite all the pressure on the sell side from pre and post June 30 selling and super withdrawals, the market has had a pull back but has not dropped significantly. We could also anticipate the selling from the financial year end and early super withdrawal would dissipate towards the end of July and into August, which would reduce the pressure on the sell side.
Also during the end of July and into August we have the annual reporting season. While we have stocks that are clearly overvalued based on likely immediate forward earnings, there are many that have had increased revenue and profits over the last 6 months and are unlikely to be affected for the short to medium term unless circumstances change dramatically. Numerous companies have recently released a revised guidance showing their profits have been unaffected or have increased over the last 6 months.
A lot of the money sitting on the sidelines is waiting to see what the reporting season brings. Once that money starts to see increased revenue and earnings, the sideline money is likely to start returning to the market through August. Combined with the drop off of current selling, we have a probability of the market rising towards the end of July and through August.
The following is from a recent interview with Marcus Padley who runs a $60 million fund that is concentrated on just Australian equities:
You obviously made some cracking calls during the COVID crash; going to 70% cash on February 20, and then "all in" on March 24, and more recently, all out again on June 12. Can you walk us through the thinking behind those big calls?
We are in 100% cash at the moment and we did it because the US market dropped 6.9% in a night. That's not normal, that is the sort of move that marks a "Big Top" and starts a correction. Corrections start fast. At the same time 25% of the ASX 200 generated technical sell signals on their charts.
We had also made a 36% profit in less than three months. On that first day of the sell-off we were bleeding performance in the recovery stocks that had served us so well. It was time to lock in, which we did.
As far as getting 100% invested again, we'll take it day by day, stock by stock. We'll just keep waking up and making decisions. A sharp rise on the back of a vaccine (a real one this time) is about the only thing I can think of that would make us move very quickly at the moment. Otherwise, it is likely to be a gradual thing because it takes three times as long to build confidence as it does to destroy it. So you always have plenty of time to do your buying. It is the selling you've got to be quick with.
If the Padley fund identified a likely weakness in the local market in the middle of June from technical indicators, it’s a fair bet that other fund managers also recognised it. While many funds are not able to go to full cash, they may well have gone heavily underweight in equities.
As the reporting season starts to lift some of the fog and uncertainty, funds could well start to flow back into the market. While there will still be some element of a rising tide lifting all boats, the next rise may be a little more selective than the one from March to June.
None of the above is certain, it is simply possible (or probable, take your pick). Trading as with business, is not about certainty, by the time it becomes certain, the boat has sailed. To be profitable in trading or business you have to consider the risk/reward profile and play the higher percentage probabilities.