Why did the stock market perform badly today after RBA rate cut?

[helpme]

When central bank cuts interest rate, shouldn't this be bullish for stock market? This is usually the case for U.S markets when the Fed cuts interest rate. Why did the stock market here perform badly after RBA cut rate today? Why do we interpret this market action?

 

[lockscombi]

I am a newbie here at Aussie Stock Forums and would like an answer to this question to. As you said it seems rather counter-intuitive. My very limited market knowledge led me to believe it should boost the economy..

 

[Triathlete]

The market is forward thinking, so this cut had been expected and so the market had already priced this in.
We can see this by the rise in the market over the last few months.

Here is something to think about......

Your job as a trader is to predict the future, thus predicting what will be in the newspaper 6-12 months time.

Professional traders buy or sell assets now, so that in 6-12 months time when the news becomes mainstream and the story is over, they can use the liquidity of the traders that are "late to the trade" ( retail traders) to get out.

 

[Knobby22]

First factor: The international share markets were not going well that day. (also today)

Second Factor: The interest rate cut was somewhat expected and some of the investors who weren't expecting it were disappointed when it happened as it points to continuing worries and weakness in the Australian economy.

 

[lockscombi]

Ah I see. Thanks for clarifying.

So we have to get good at predicting the future!

On that point is there any easy way to predict something like a GFC? Obviously predicting something like this will make you rich but I'm not sure if that is at all possible..

Are great investors good at reacting to the warning signs OR good at reacting when the crash is in motion? If it is the latter that would mean we would all have to be day traders somewhat right? I mean if you like to trade on a weekly or monthly basis you would go broke during something like a gfc crisis, seeing as it hits pretty bloody hard and fast!

Thanks in advance

 

[Triathlete]

Ah I see. Thanks for clarifying.

So we have to get good at predicting the future!

On that point is there any easy way to predict something like a GFC? Obviously predicting something like this will make you rich but I'm not sure if that is at all possible..

Are great investors good at reacting to the warning signs OR good at reacting when the crash is in motion? If it is the latter that would mean we would all have to be day traders somewhat right? I mean if you like to trade on a weekly or monthly basis you would go broke during something like a gfc crisis, seeing as it hits pretty bloody hard and fast!

Thanks in advance

If you are able to read a chart and have a sound knowledge of Technical analysis than there were many signals given to change your view on the market many months before the eventual crash.

Many technical traders would have either closed their long positions, hedged their positions and even taken a short position view at the time based on what was unfolding on the chart. This could all be seen clearly on a weekly or monthly chart if you understand what you are looking for....

 

[Valued]

If you are able to read a chart and have a sound knowledge of Technical analysis than there were many signals given to change your view on the market many months before the eventual crash.

Many technical traders would have either closed their long positions, hedged their positions and even taken a short position view at the time based on what was unfolding on the chart. This could all be seen clearly on a weekly or monthly chart if you understand what you are looking for....

And some global macro traders may have realised the crash not on technical analysis but on the raw economic data. Sometimes there are a couple of ways to go about it.

Predicting the GFC might be a bit hard though. Technical indicators are often obvious in hindsight but if you're living the market sentiment it may be a bit difficult. I think many people who say they do technical analysis would still read the news and take into account basic economic data like interest rates. Even if you're looking at the economic data everything probably looked good at the time if you adopted a simple checklist approach of looking at the important basic data. You may have just said "wow the housing market is going from strength to strength, this is a good sign".

I like to adopt a top down approach of considering the economy first before I look at the chart. I find it hard to read charts in context if I don't know what is happening in major economies. A pure technical analysis approach may be ignoring obvious data like interest rate decisions.

 

[Triathlete]

And some global macro traders may have realised the crash not on technical analysis but on the raw economic data. Sometimes there are a couple of ways to go about it.

Predicting the GFC might be a bit hard though. Technical indicators are often obvious in hindsight but if you're living the market sentiment it may be a bit difficult. I think many people who say they do technical analysis would still read the news and take into account basic economic data like interest rates. Even if you're looking at the economic data everything probably looked good at the time if you adopted a simple checklist approach of looking at the important basic data. You may have just said "wow the housing market is going from strength to strength, this is a good sign".

I like to adopt a top down approach of considering the economy first before I look at the chart. I find it hard to read charts in context if I don't know what is happening in major economies. A pure technical analysis approach may be ignoring obvious data like interest rate decisions.

Yes I agree all very valid points

But what is happening in the economy should be showing up in a chart???

I also use fundamentals in my analysis not purely technicals , however when I can see clearly a situation forming and in the case of the XAO chart a few months prior to the GFC.

I would have concluded that we had completed a wave 3 around the 27th July 2007 this was a 162% rise from the 5th may 2005 which would have alerted me then to the fact that there was possibly only a wave 4 retracement followed by the 5th wave before a correction was likely and so would have taken positions based on that assessment.

In my opinion using the wave principle as one of my tools that I use helps me understand what is actually happening in the markets.

 

[Valued]

Yes I agree all very valid points

But what is happening in the economy should be showing up in a chart???

I also use fundamentals in my analysis not purely technicals , however when I can see clearly a situation forming and in the case of the XAO chart a few months prior to the GFC.

I would have concluded that we had completed a wave 3 around the 27th July 2007 this was a 162% rise from the 5th may 2005 which would have alerted me then to the fact that there was possibly only a wave 4 retracement followed by the 5th wave before a correction was likely and so would have taken positions based on that assessment.

In my opinion using the wave principle as one of my tools that I use helps me understand what is actually happening in the markets.

The market can be slow to react to structural changes though and I don't think it will show up in the chart. I dislike technical analysis like elliot waves. Seems as random as relying on moon cycles or astrology to pick your trades. The only technical analysis I would do is basic. Like even if I am bullish on something I am not going to buy right into it while it is falling. I just look at the trend including moving averages, support/resistance points, and then I just consider the ATR and volume so I know what I am dealing with. I don't understand why anyone would bother with elliot waves, which there isn't really any scientific evidence for its validity, vs just learning some macro economics.

 

[Smurf1976]

There's the "why" factor as well as the "what" factor at work here.

What - central bank has cut interest rates. Cheap money should be good for the market.

Why - that's the bad bit. Central banks cut interest rates because things aren't going great economically and they're worried about the situation. Markets look ahead and in this case we've got someone credible, the RBA, taking action because they're concerned about economic circumstances. That suggests the future may not be so good after all = market doesn't like the message being sent and goes down.

A further concern there is that the RBA is running out of "bullets" to fire at problems. Back when interest rates were over 10% there was a lot of room to move if something went wrong and few questioned what the RBA could achieve. But with rates down to 1.5% they've already used most of their ammunition so there's not a lot left if something major were to go wrong economically.

As an analogy, suppose that your best friend proudly tells you that they've given up the smokes, cut fat and sugar from their diet and are also aiming to lose weight. Sounds good for their health, right? But it's not so good if you then find that the reason they've done it is because their doctor had a firm chat which scared the **** out of them - change now or they'll soon be dead. Now you know the reasons you'll see it as a bad situation since whilst some positive action is being taken the real issue is that their health isn't in good shape right now. As their friend you'll be hoping it all works out OK but if you had to bet real money on how long they'll live, well you can't escape the doctor's assessment of the situation.

Much the same with the RBA. They're trying to give the economy a boost - but only because it's struggling in the first place. It would be better if the economy was strong and the RBA didn't see anything to worry about. As with our friend hoping to avoid a heart attack, we can only hope that the RBA's actions are indeed effective but we're not out of danger until proven otherwise.

 

[Triathlete]

The market can be slow to react to structural changes though and I don't think it will show up in the chart. I dislike technical analysis like elliot waves. Seems as random as relying on moon cycles or astrology to pick your trades. The only technical analysis I would do is basic. Like even if I am bullish on something I am not going to buy right into it while it is falling. I just look at the trend including moving averages, support/resistance points, and then I just consider the ATR and volume so I know what I am dealing with. I don't understand why anyone would bother with elliot waves, which there isn't really any scientific evidence for its validity, vs just learning some macro economics.

I guess we all just do what we understand and feel comfortable with...

 

[Modest]

I agree with you Triathlete

It's all in the chart.

Back in 2010 there was a 'flash crash' everyone had theories, everyone was referring to it as a computer glitch etc etc

https://www.theguardian.com/business/2015/apr/22/2010-flash-crash-new-york-stock-exchange-unfolded


Daily



If you look at the same period on a 4HR chart and focus on the vol bars (if you're lazy slap on any ol oscillator instead) evaluating momentum you can see rising on more and more bearish volume. Simple math says if you're rising on less bullish volume you're eventually going to have more bearish vol than bullish. So you get a lot of warning ahead of time on the lower time frame to be very cautious.



Weekly



Where did price go to? random?

 

[Smurf1976]

And some global macro traders may have realised the crash not on technical analysis but on the raw economic data.

I recall very well reading an analysis of the US car manufacturers and mortgage lenders as far back as 2002 which strongly suggested trouble was brewing. My own research confirmed that there was a factual basis to that analysis, the information being used matched reality, and that if the worst did happen then it was going to be a big problem.

I had no idea of the detail as to how it would play out but a point came where we had an increasing number of mortgage lenders failing, desperate measures to sell cars being used in the US, the oil price going through the roof and interest rates also rising. Put that lot together and sooner or later something was surely going to "break", the only question being in the timing and detail. There was a very clear warning there that something was about to happen in the not too distant future. Not long after the ASX peaked and the rest is history - the GFC.

As a non-financial analogy, suppose that you see a P plate driver speed past at 200 km/h on a wet road. You don't need to be a cop with 30 years experience, paramedic or even a tow truck driver to know what's going to happen. The only question is in the detail - when and where they crash and with what consequences. Maybe they slide of the road at the next bend, maybe they hit a tree a month from now, whatever. But if they keep doing it then sooner or later it's going to end badly, that's virtually certain.

Same concept with finance. If risks are ignored and money's being thrown around like there's no tomorrow then bad things will happen sooner or later.

 

[Valued]

But if they keep doing it then sooner or later it's going to end badly, that's virtually certain.

Yea, the issue is being forced out of your position. You may be certain that something will happen but the range of the instrument you are trading may force you out earlier and you get stopped out of good positions due to timing.

 

[fiftyeight]

Look at Trembling Hand's blog during the run-up and GFC

Great read

 

[lockscombi]

If you are able to read a chart and have a sound knowledge of Technical analysis than there were many signals given to change your view on the market many months before the eventual crash.

Many technical traders would have either closed their long positions, hedged their positions and even taken a short position view at the time based on what was unfolding on the chart. This could all be seen clearly on a weekly or monthly chart if you understand what you are looking for....

Hi Triathlete. I have read many of your posts. Thank you. Atm I like looking over a company's 10yr stock price chart and read each companys balance sheets in the last few years. That's a good start but I am interested in what specifically you see before a great big crash..

Is it as simple as seeing a vast amount of volume selling their stocks? For example, a couple days before 9/11 there was a huge spike in selling American Airlines and United airlines shares. If I saw something like this is it a simple decision to get the hell out? Is there software that can alert me of uncharacteristic stock sells?

Of course, I understand there are many cumulative factors of why economies get to a point like the GFC
but gee wouldn't it be nice to be alerted if s*^% hits the fan

 

[lockscombi]

Look at Trembling Hand's blog during the run-up and GFC

Great read

Thanks! I will have a good read tonight

 

[Triathlete]

Hi Triathlete. I have read many of your posts. Thank you. Atm I like looking over a company's 10yr stock price chart and read each companys balance sheets in the last few years. That's a good start but I am interested in what specifically you see before a great big crash.. Is it as simple as seeing a vast amount of volume selling their stocks? For example, a couple days before 9/11 there was a huge spike in selling American Airlines and United airlines shares. If I saw something like this is it a simple decision to get the hell out? Is there software that can alert me of uncharacteristic stock sells?

Of course, I understand there are many cumulative factors of why economies get to a point like the GFC
but gee wouldn't it be nice to be alerted if s*^% hits the fan

If you are going to trade using charts then you need to have signposts along the way otherwise how do you know when you get there???

This is one reason why I use a combination of Price ,Pattern and Time in my analysis when studying charts. I like to use Elliott Wave when a chart clearly shows it ........as it is not evident always and you would need to use other techniques of technical analysis......... which in my case is Cycles theory.

Read my blog post on Price ,Pattern and Time for a basic understanding.

Elliott wave is subjective which is why many traders find it hard to use but for myself in gives me an understanding and the sign post as to where the market is likely to go and at what price levels to look for.

This form of analysis should not be used in isolation that is why we need to combine it with price and time to form a better picture as to what is likely to happen in the future as we are using leading indicators and not lagging indicators.

What I have described above are advanced techniques in Technical analysis so for the beginner it can be quite hard to understand...sorry..

Remember to take a look at my blog post on the subject.

 

[Triathlete]

Is it as simple as seeing a vast amount of volume selling their stocks? For example, a couple days before 9/11 there was a huge spike in selling American Airlines and United airlines shares. If I saw something like this is it a simple decision to get the hell out? Is there software that can alert me of uncharacteristic stock sells?

This is a good question....I have not looked at either of these stocks on a chart so will make my view based on what you mentioned above.

Now from a fundamental point of view you may have been convinced that the share price was likely to rise in these two stocks based on a growing EPS over the next 1-2 years and oil prices and cost could be keep under control after also reading their reports.

So fundamentally ticks all the right boxes as far as you are concerned.

Now we look at their charts and we see that technically the stock is also being supported so all is good there.

Now if I was holding the stocks and began seeing a lot of selling I would have to ask why would that be, since both the fundamentals and technicals are aligned.

I would have to question whether everything written in the fundamental report is correct...The first place you are going to see anything amiss is on a chart.

Has some information been given to the big players (inside information) and are starting to reduce their positions???

The only people who really know what is going on with the company are sitting in the board of directors.

In the scenario above it is obvious now that people knew what was about to happen and were taking positions as they new the share prices of airlines would collapse at least in the short term.

This is an extreme case but I would take a view like this with any stock I may be holding.

If I was not sure I would look at hedging that position just to cover myself, so it would then make no difference whether the stock went up or down and not be concerned in the short term until more details became clearer.

 

[Valued]

I would have to question whether everything written in the fundamental report is correct...The first place you are going to see anything amiss is on a chart.

Has some information been given to the big players (inside information) and are starting to reduce their positions???

The only people who really know what is going on with the company are sitting in the board of directors.

People need to just learn Warren Buffets fundamental analysis techniques. If you are too lazy to get on your private jet and go personally to see the board of directors and ask them what is going on with your company then there is your problem