Is it time to panic?

This is an extract from the daily Marcus Today newsletter on Thursday 28th January - the day after the Dow Jones fell 634 and our market fell 180 points on the open - the first significant sell off in 2021. 

Our market is down 180 points this morning - the first material one day sell off in 2021, in fact, since the vaccine news in Mid November last year. Is it time to sell everything and run to the hills. Cashing up is our forte. We're not cashing up.

It is too early to start pulling levers on the "Cash versus Equities" equation but the alarm bells ring when a market takes a sharp drop from a record high. There is a short term Relative Strength Index sell signal on the S&P 500 (predictably) after the pull back last Thursday. Corrections start fast and while the support for the market will come in fast enough because (so far) there is nothing fundamentally new/wrong other than high share prices, the herd is not predictable and we could easily see some short term sell-off.

We are fully invested and the obvious debate is whether to do any cashing up. If I was you, a private investor without rules, without $100 million to invest and absent a funds management mandate, I might well decide that enough is enough for the moment and pull some stumps. Just in case.

But there isn’t much wrong with the market other than the herd changing its mood. So any sell-off is unlikely to be long-lived. But it might be enough for you to want to be cute and take some profits with the hope of getting back in at lower prices.

The record highs and a significant PE expansion (markets getting more expensive) in the US against a pandemic-damaged backdrop seem premature and somewhat exuberant and mildly illogical – so you could put a case together for selling. Here is a chart of the S&P 500 and ALLL ORDS PE’s in the last 5 years:

But one day does not make a correction, and we are not about to start thrashing about because of it yet – the Dow Jones could easily bounce 634 points tonight. So, for investors all you need do is wake up, turn your screens on a bit earlier and keep reading Marcus Today for our daily take on what to do about a market that has cracked for one day. Traders would be forgiven for taking some profits.

IF THERE WAS A CORRECTION

Let's assume there is a correction starting today. If there was, what should happen and what should you do? Here are a few bullet points.

• You'd sell something. Cash is the only defence. Buying stocks, defensive stocks, that go down less savagely in a correction is for fund managers, not individual investors. There is nothing wrong with selling. It can be cathartic and will leave you going to bed tonight hoping the market falls over. Take a break. It has been a good run.
• I’d assume any sell-off was simply a herd “head fake” – not a meaningful or fundamentally based correction, just the herd dropping its pants for a moment. There is nothing fundamentally new/changed/different/worrying. So if you sell, you are being cute. If there was a new element, a war, a virus mutation, a trade dispute, it could well develop, but a shorting fiasco in small US stocks, a couple of lazy results in the US...it's not enough to start an actionable correction. It could develop, but at the moment the main reason to sell is short term, for peace of mind, to take a break, to take a profit, to re-assess. Not because there is an earnings risk event developing. It could...but it's not obvious yet.
• Selling to Buy - What would drive us to sell is to raise cash, not to outperform, but to have some ammunition to buy stocks when/if they fall further. Any short term correction will quickly become a buying opportunity in a vaccine roll-out world recovering from a pandemic. If you’re fully invested, as we are, you need cash. You need to sell something, to exploit buying opportunities in stocks you like. That's about the only thing that would drive us to sell. Not fear....but opportunity.
• Profit-taking - Vulnerable stocks are stocks that have performed well – they are more vulnerable to profit-taking. Check your list. Any fliers on infinite PEs? They will be sold down first/hardest if it happens.
• Go Defensive - The obvious moves for fund managers that are judged on relative performance is to get more defensive. Defensive sectors will presumably outperform in a falling market. That would include buying gold stocks, healthcare, consumer staples, utilities and sell high PE tech stocks. You may even make some money in a correction, but it's a low odds game for individuals, trying to make money in a falling market.

Bottom line - We haven't reacted to the sell-off yet although we see the sell signals in Energy and the US markets in the short term (see TECHNICAL OBSERVATIONS below). We'll wake up tomorrow and see if it has developed or not.

This is an extract from the daily Marcus Today newsletter on Thursday 28th January - the day after the Dow Jones fell 634 and our market fell 180 points on the open - the first significant sell off in 2021. For a free trial of the newsletter and to experience our daily commentary CLICK HERE

Meanwhile...the FOMC

The FOMC left rates alone and its Statement didn’t appear to move the market. The first line pretty much sums it up: “The Federal Reserve is committed to using its full range of tools to support the U.S. economy”. Other comments include “The ongoing public health crisis….poses considerable risks to the economic outlook” and “With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2%for some time so that inflation averages 2 percent over time” and “The Committee expects to maintain an accommodative stance of monetary policy until these outcomes (a 2% inflation rate) are achieved”. So policy is going to be on hold and accommodative for a long time. On QE they said the “Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals” – in other words – no tapering of QE.

STOCK STUFF - This is extract from the Marcus Today newsletter on

• The AFR is trying to make something out of the most shorted list in the wake of the US “Most Shorted Stock Squeeze”. We published the list of most shorted stocks yesterday. The AFR lists stocks in the order of how many days of average volumes it would take to cover the current short position. The stocks most likely to see a short squeeze on that calculation include – good luck chasing this fad although it is clear looking at the charts below - some people are trying. The list of most shorted stocks is in the newsletter today. This is the table from the AFR.

• Healthcare bottom – Although we probably shouldn’t be looking to buy, in terms of quality stocks, the opportunity at the moment is in healthcare. The sector has been hurt by the strength in the Australian dollar. As the market tops out you might just find the Australian dollar tops out as well. There are already some mild signs of this. There is a chart of the Australian dollar and the healthcare sector.

• Resources sector topping out? - The resources sector led the market down yesterday falling 3.42% after a 75% rally from the low last year. The iron ore price is up 0.5% this morning.

• BNPL minnow Splitit (ASX: SPT - $513m market cap) put out merchant sales numbers this morning with volumes up 218% in the fourth quarter year-on-year. Group revenue up 359%. Big numbers but worth noting that gross revenue is just US$2.9 million. When it comes to a share price being part fundamentals and part sentiment – sentiment is high (!) – here are their numbers from Refinitiv:

• What a joke – As Gamestop (code GME on the NASDAQ) jumped 92% yesterday and another 134% last night – GME Resources (code ASX:GME), which is listed on the Australian stock market, jumped from 66c to 75c on no news yesterday and is up 40% today. Please tell me all there is a fundamental reason other than complete nuff nuffs confusing the code for the US stock – although if you can make money being a nuff nuff, whilst disturbing for intellectuals, all power to you.

As I said at the start of this piece, it is too early to start pulling the levers on the 'Cash versus Equities' equation. But if/when that time comes, we will be ready to act and will be making sure our community knows how to protect their capital.

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