I thought the rather dramatic headline might catch your attention. Read on for one technical trader's prediction of an impending stock market correction, and how I'm intending to play the markets now, and in the aftermath of any such 10% market fall, should it come to pass.
But first, to more mundane matters.
Yesterday, the ASX notched up a seventh consecutive day of gains… climbing the proverbial wall of worry, slowly and steadily. Making money slowly is so boring. As you'll read below, one day my family started with an investment of a couple of thousand dollars in Woolworths (ASX: WOW), and then 21 years later, in the blink of an eye, it has turned into hundreds of thousands of dollars. So utterly boring… who'd do this stuff for a living?
In morning trade, the ASX is on the up again, despite a falling iron ore price putting further pressure on miners. You can't say we didn't say this day was coming. It's what happens when increased iron ore production collides with slowing Chinese growth.
Shares in BHP Billiton (ASX: BHP) is only down modestly today, largely courtesy of its diversified portfolio of assets. Still, I'm not tempted to top up my holding in The Big Australian, waiting for a potentially lower entry price. I've been waiting a while, and can certainly wait a while longer too. It's what successful investors do.
Meanwhile, in what is sounding like a rather familiar ring, the banks and stocks like Woolworths and Telstra (ASX: TLS) continue to do the heavy lifting on this fine and dandy Tuesday morning.
Banking on healthy fully franked dividends
Speaking of banks, The Age reports three of the big four banks have hit all-time highs this morning. Commonwealth Bank of Australia (ASX: CBA) is nudging $80, Australia and New Zealand Banking Group (ASX: ANZ) is getting closer to the $100 billion dollar club, and Westpac Banking Corp (ASX:WBC) is trading within a whisker of $36. Nothing seems willing or able to get in front of the banking steam train, even though I'm not the only one who thinks they are trading on the expensive side.
Just yesterday Australian Ethical portfolio manager Andy Gracey was quoted in the AFR as saying… "The fair expectation of healthy dividends mean the bank stocks are still attractive to hold, despite prices being stretched to over-valued, but I wouldn't be adding them at the moment." Someone's definitely adding to their banking stocks, even if it is mostly the high frequency traders. Let them trade, I say. I've got better things to do.
As for Woolies, I must admit to being pleasantly surprised with the 2% gain in my Woolies shares yesterday, especially as the stock is trading ex-dividend. Like the banks, it also is trading at close to an all-time high.
Woolies — classic Buffett, although a little on the expensive side
Woolworths is one of those classic Warren Buffett stocks — high barriers to entry, strong competitive advantage, and predictable earnings. As such, you might be thinking it's an ideal candidate for inclusion in the Motley Fool Share Advisor portfolio — the 'best of the best' stocks chosen by analysts Scott Phillips and Andrew Page, exclusively for subscribers to that stock-picking service. It is. Except for its price.
You see, Foolish readers, valuation matters… always. And with Woolworths shares trading on a P/E of around 20, Scott and Andrew can't see the P/E climbing too much from here, especially for a business they think will likely deliver mid-high single digit growth. Still, as a holder from its IPO way back in 1993, when the shares were floated at $2.45, I'm happy to hold on for the ride, and the fully franked dividend.
Turning a few dollars into a small fortune
Good old buy and hold investing wins again. By reinvesting all dividends, and doing nothing much more over the past 21 years, my family has turned a very modest investment in Woolworths into a very meaningful, and still growing, six figure sum. Back to the fun of the markets, and to the fun of predicting the next market correction.
Although U.S. markets closed modestly up overnight, judged by the report on Bloomberg, there was a fair bit of intraday volatility… "U.S. equities began higher as large companies rallied on optimism about merger activity. Stocks turned lower as the U.S. and European Union imposed new sanctions on Russia, while selling in Internet and small-cap stocks spread to the broader market. Major indexes recovered in the afternoon, turning positive during the final hour of trading."
And that's all in just one trading day. Lucky we slept through that, huh? Who knows what tomorrow will bring? As ever, there's never a shortage of people predicting the worst.
WARNING: Market correction ahead
In John Wasiliev's latest AFR column, David Hunt of the well-named Adest Profit Hunters is quoted as saying he expects a U.S. market correction between May and July. Mr Hunt, a prominent technical trader, says technical indicators linked to the Dow Transportation Index — like the moving average convergence divergence and momentum — appear to be slowing. You couldn't make it up if you tried. I repeat "Moving average convergence divergence and momentum." Words fail me.
A correction is defined as a fall of 10%. Bring it on, I say.
I'm cashed up and ready to pounce. Not that I'm expecting a correction, mind you. It's just that I like to hold a decent level of cash specifically for those unexpected moments… when all around , including the "converge and diverge crowd," lose their heads and sell indiscriminately, regardless of valuation. I'm the person on the other side of the trade.
You can't kill this bull market
"Bull market won't die until a recession hits: RBC" Genius. Absolute genius. In case you're worried a recession is just around the corner, fear not. The boffins at RBC say the slow U.S. economic recovery means another recession is a fair distance away. Better, they say their bull-market thesis remains intact: Price-to-earnings ratios will continue to expand, leading to double-digit returns over the next few years.
Let it be on their heads if the "moving average convergence divergence and momentum" ultimately tells us otherwise. Riveting.
