Investors need to be ready to buy stocks

Given that I am anticipating a correction in the next few weeks, or as soon as overnight. It falls upon those who support my premise to be ready for the correction. That is to say that we want to be fully prepared to buy back into the market, or unwind short positions when the market has reached its bottom. Now, we need to recognise an important distinction between stocks:
1. Blue chip stocks are more liquid - They take time to fall. That's why the 'safe investor' prefers them. They will lose 10% in a day, but they will do so with a lot of volume, and more than likely with considerable range trading, or intra-day variability. Now, I am expecting a 20% fall in the S&P500 (US) and 12% in the ASX-200 (Australia), so this is largely the response I'd be looking for in the blue chip stocks which account for the bulk of the market. Of course, some will perform better than others.
2. Spec stocks are illiquid - They will fall off very quickly because they are in a sense considered 'unsustainable' stocks, insofar as they have small 'vulnerable' projects, no assurance of cashflow to finance projects, and less ready access to finance when they need it. i.e. You are vulnerable to equity raisings at low share prices. This is however a generalisation that we can opportunistically profit from. Just as importantly, we need to realise that spec stocks are not going to behave in the same manner as blue chips - because they are less liquid. We can expect a sudden collapse because there is a complete withdrawal of buyers. Some of these buyers were only manipulating the market in any respect so they could unload stock, so you can expect the withdrawal of false support as well as 'true believers' who misjudged the market. Then of course there are all the sellers front-running each other to unload stock because they fear a 'liquidity crush' at this end of the market. This of course prompts a more severe correction in the specs. It also means that there is considerable panic. We can as investors profit from others panic. We need of course to have some better appraisal of the market, or some semblance of awareness as to the specific merits of specific stocks, which might be expected to perform better than the rest, or defy the 'general market sentiment'. After that initial collapse, and we are looking for a '2-3 day period of fear-induced selling', there is destined to develop a 'spread' or 'buyer-seller' gap in the illiquid specs. That's after all part of the liquidity problem, the 'ambivalence' over price discovery. Is the market going to fall further. If there is a big gap between buyer and seller, you have likely reached the stock's bottom, and you will see an 'infilling' of that gap, and eventually a restoration of confidence, and a recovery in the stock. This pattern is also conveyed through analysis of candlesticks. If you have not invested just before the 'gap' develops, then you have missed the 'sweet optimal buy zone'. The question is whether you are able to get adequate 'liquidity' to get a good enough position/volume of stock. Be careful to 'fill up' the 'buy side' of the market, as you are actually creating confidence. Similarly if you take out all panicking sellers, you will give comfort to sellers. They can see you 'off screen' buying up small volumes.

The lesson is that, we might wait for the stock index to 'find bottom' before we buy in the blue chips, but in the spec end of the market, you are more likely to be looking at a point of 'exaggerated fear' in the market. Specs cannot keep up the same length of collapse as the blue chips simply because they are falling by greater percentages each day. This is a vulnerability in the specs; but as we all know, its a source of opportunity as well. Not all sell-offs are so rapid, but the nature of markets is changing with derivatives, so rapid corrections are becoming more commonplace. Of course before you can buy, you need to have your trading account set up, linked to your bank account, and your bank account funded. A broker these days will not buy without money in the account, and you can't buy unless you have cash (liquidity). So this is a 'sell opportunity' I believe. Refer back to my arguments for suggesting as much here.

In my Global Mining Investing eBook I introduce investors to the benefits of investing in spec mining stocks. Its a livelong education that encapsulates other skills. I'm using investing as a practical outlet for your intellectual development, in the same way as its had that practical manifestation in my life. This will include consideration of trading systems, psychology, philosophy, politics, finance, accounting, mining engineering, geology, geophysics and mineral processing and markets. Why do you have to learn technical geoscience? You don't, but there are several reasons to heed:
1. Its probably the best way to make money - both generally and specifically at this point in the economic cycle. Firstly from demand-based stocks as well as precious metals.
2. Its a practical outlet that will sustain your 'practical interest' as opposed to abstract topics that you might struggle to integrate and endue.
3. Its an integration with broader lifelong cognitive skills like critical thinking
4. Its rooted in economics, psychology, science and philosophy, so introduces analytical skills that most people fail to get from memorisation in the school system. This is after all why our empirically-driven political system is failing us....we only got half an education. The half that makes us compliant relativists.

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Profit from mining with Global Mining Investing eBook

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

An imminent correction in global equity markets is coming

In previous blogs I have alluded to the fact that the next 10-15 years will be punctuated by a succession of boom-bust events. The reason is that the fundamentals for the global economy are very good. The problem is that there is a process of adjustment under-way, and the Fed and other central banks are making sure that it comes sooner rather than later. They are doing so because, having caused an economic crisis by attempting to sustain the unsustainable boom, they are now attempting to sustain the 'normalcy' of the current 'persistent recession'. Well, recession if you are unskilled labour in the West. If you are skilled, or living in emerging markets, you're probably not going to feel what is about to happen.
I'm expecting in the next week, maybe even overnight, a correction to start in the S&P500. I expect the S&P500 to start falling from around 2000 at present to a support level of 1600pts. That's a 20% fall. I'm actually expecting the ASX-200 (Australian) market to fall back from 5624 to around 4950-5000 point mark. The reason is that resources are priced low, so the Australian market is relatively subdued anyway.
In either case, after these 'asset price' corrections, these markets will recover quickly, and I fully expect that by the end of 2015, they would have reclaimed those losses. The reason is because the current rally was too strong, too fast, and the evidence or justification for it will probably not emerge to later in the year.

I reiterate the global market outlook is fundamentally good. Its just in the short term assets are overpriced, and there is a need for a correction to allow reasonable value to be sustained. The reason I've expecting a correction is because:

1. Asset prices are very high - the best evidence is probably this Forbes media article, which was published back in July 2014. Since then, the S&P500 has climbed even further to 2000pts. They didn't pick a 'level'. They were purely going off fundamentals. Well, now you have a technical 'indicator'.

2. The uptrend has been broken - see the chart above - care of Google Finance

3. The S&P500 is at an important psychological level - its not breaking the 2000 point level convincingly, but rather wallowing around it. I would argue that it is being sold into. Even in the resources market, for the last 2 weeks, I have sensed that the market was being 'sold into'. People were unloading, expecting a correction.

4. You don't get a rally after a persistent rally like the one we've just had. The market needs a correction. It has been 7 years since the last correction - so we are due for another. Now, also note that this 'bubble' is bigger than the last 'bubble'.

Now, there are people arguing that this will be the end of the world...swarms of locusts will inherit the Earth. I'm not in that crowd. I'm arguing that this is simply an opportunity cost that you can avoid. It would be sad if you retained your shares now, because you can buy them back cheaper soon. But if you don't, do it at a reasonable price, just hold them because you'll probably get a bad re-entry price anyway. In any case, you probably have cash to buy more later - and you should do that. Don't sell during the collapse because you might get really bad prices. Maybe you want to hedge your bets if you are uncertain...if stocks are akin to gambling to you. I suspect however there will be some logic in what I say. I'm not even arguing that there is some imminent rise in interest rates. I think interest rates are staying low. There might be a modest increase in some countries worried about 'bubbly asset prices', but it will be intended to discourage you buying property rather than to 'tighten lending' to slow the economy'...in which no one is spending except on investment property. 

Whilst you are waiting for this correction, which is not long off, I hope you will take the opportunity to acquaint yourself with my latest publication 'Global Mining Investing'. These will be great stocks to own, whether to invest or trade moving forward. We actually want to teach you how to invest; but moreover we want to use investing to teach people how to think analytically. It will have applications in other areas of your life. Critical thinking is an undervalued tool, and we will be exploring stocks using your mind and our experience. We are discovering you from outsourcing responsibility for your money. We want to empower you, so you develop a sense of efficacy in investing. Of course we want you to profit as well - financially as well as intellectually. But we think it will mean more to you if you made the money yourself. Some of you will not have as much time. You'd be surprised how much time you do have when you are supported by other investors, potentially your partner and kids, as well as your passion for learning and profiting from your learning.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

The market upside is looking a little 'tentative' in the short run

Asset prices are relatively high. In such times, you have to question when or what can undermine them, and what will not. The reality is that the stimulus of the previous few years has meant that conditions are rip for economic growth. There is however considerable concern about the sustainability of that growth given that a lot of the past growth was fuelled by debt finance in the West. You might wonder however why we cannot expect more of the same. The reason is that there is considerable concern about the prospects of higher interest rates. The reality is that there is no reason for central banks to raise interest rates more than modestly to end the 'ultra-easy' monetary policy. The reason not to do that is simply that the economy is not strong enough. Those fears are however positive in some respects because 'fearful' mortgagees are rapidly paying off their debts, and that is of course preparing the way for another cycle of spending moving forward

For these reasons, you can expect a sustained growth in the global economy, on the basis that:
1. The fundamentals are good, i.e. Asia and other emerging markets keep getting richer, with strong rates of economic growth, income growth, high rates of urbanisation, strong population growth. Its all good.
2. Interest rates are ultra-low, so moving back to neutral policy will not greatly affect spending since that nominal rise in interest rates will only be taken when it won't hurt spending. i.e. The Fed will wait for signs of an overheated market before it raises raises, to establish a sustainable growth outlook
3. There is no sign of inflation simply because there is no wages pressure. Moreover there will not be wages inflation for another 15 years or more, i.e. There will be no wages spiral for over a decade. So we don't need to worry about 'cost-of-living' inflation.
4. There is every reason to expect asset inflation. This process has been well-entrained since 2000. Ultra-easy interest rates have been around for a long time. The Fed and the Western governments were not interested in sustainable economic policy, they were interested in running the economy as 'fast or as hard as they could get away with', without paying the consequences. This might strike people as sensible. i.e. Its actually the same policy as applied on the Titanic. Now, do they understand the global economy so well? Well, you'd have to wonder. They simply can't know what can thwart it. The greatest threat would have been SARS. But they might well get away with it. In any respect, the fundamentals are good. So whilst you can expect bursting equity and property markets, you can expect them to rebuild or recover in the current market. You should however look to trade these positions however to maximise wealth. This means using 6mth or shorter charts to pick entries and exit points.

On that note, looking at the following charts for the Dow Jones, we can see that:
1. The long term trend for the market is at its highs, and that it has downside to 15,000 points. I'd even expect it to go to support at 14,810 points.
2. The short term 6 month trend has seen the market rise back above the Moving Average. We will be interested to see evidence that this trend continues. Certainly the 176 point rise today is a positive lead.
We should not however overlook the fact that the market is getting peakish, and there is a need for a little short term scepticism if we are going to trade this market efficiently.

I'm looking for a market peak around 17,100-17,300 points; from which I think you can expect a substantial correction .The most logical correction would see a fall back to the 14810-15,000 point level. One already gets some sense that one's buying is getting 'sold into'. i.e. One gets the sense that for every order one places, there is a 'bigger player' getting out. This is most apparent in the less liquid stocks. Looking ahead, I'm expecting a very lucrative recovery from any sell-off. I'm expecting the next rally will offer a lot of profits based around a lot of Mergers & Acquisition (M&A) activity. This next rally I think will get consumer spending momentum going again.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Outlook for US & emerging equity markets - the next 6 months and beyond

There is some ominous news around of ebola virus spreading fears. It is improbable that such fears will manifest as any sustainable problem, however there is good reason for people to monitor the issue. There is some good news from China with growth in manufacturing. The job growth in the US was not as positive as expected, however we remain in a low interest rate environment, and the global context is largely stimulatory, even if economic activity is largely flat. The lack of spending is really just a concern that needs to feed its way through the economy. People are not going to start spending until skilled labour see wage gains, and then this will give unskilled wage earners more confidence despite 'wage restraint' at their end.
At the same time, strong employment and wage growth in the emerging markets mean these economies are going gang-busters. Its really just a patience game waiting for the economy to recover. The question is what will equities do in the meantime. I'm inclined to see the current sell-off as just a temporary correction. Using charts, I'm expecting a fall in the US S&P500 back to 1880 points, and a restoration of the rally. I'd not expect to see a collapse in earnings, and since yields are not overly high, then I'd expect more upside. You can however expect a bursting of high asset prices (including equities) at some point. In fact, I'm expecting a succession of 'small bursting bubbles' before a final 'serious burst' when we see higher interest rates.

                                Source: Google Finance

There is another reason to expect higher equities. There is a great deal of Chinese and Japanese money that it destined to pursue foreign markets. i.e. Japan bonds will experience a sell-off in favour of higher-yielding growth assets. The same for China. This will raise interest rates somewhat, but there will be a corresponding rise in economic growth. 

In the chart above, I'm expecting a large drop in equities to 1880 points on the S&P500, however I'd expect it to recover strongly in intra-day trading. 

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com