What you need to know to survive the ASX market meltdown

Our market is facing an inflection point with the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index likely to test a psychologically important support level today.

The futures market is pointing to a circa 2% drop for the top 200 stock benchmark, which will take the index to just under 6,000.

How the market reacts to the drop will probably set sentiment over the next few days, if not weeks.

The weakness comes after US equities crashed in overnight trade with the S&P 500 diving a whopping 3.3% to its lowest level in three months.

There are a few interesting points about last night’s sell-off.

  • The trigger for the crash is not based on any new developments. The finger is pointed at the usual suspects such as rising bond yields and escalating trade tensions between US and China.
  • While the drop in US equities is broad-based, it’s confined to stocks with other asset classes not battering an eyelid.
  • This is good news and indicates to me that the sell-off will be very short-lived (assuming the panic doesn’t spread to other asset classes).
  • The US 10-year Treasury yield hardly moved from 3.21% while the US dollar added less than 0.1% against a basket of major currencies.
  • Interestingly, gold found favour with stressed-out investors with the precious metal adding 0.4% to US$1,196 an ounce.
  • Gold has not been much of a safe harbour in recent times as investors have preferred the safety of the US dollar. It will be interesting to see if this trend continues as it will mark a significant change in global risk perception (meaning lower confidence in US economic growth).

I suspect our best-performing stocks will be hit the hardest and that means ASX darlings like CSL Limited (ASX: CSL), Cochlear Limited (ASX: COH) and Appen Ltd (ASX: APX) could be taking the brunt of the selling.

Our gold stocks like Newcrest Mining Limited (ASX: NCM) and Evolution Mining Ltd (ASX: EVN), as well as traditional defensives like Telstra Corporation Ltd (ASX: TLS) are likely to fair better.

The sell-off doesn’t surprise me although I thought it would have come a little sooner. I took some profit and have moved 20% back to cash after the August reporting season as I thought there were few positive catalysts for the market in the near-term but a growing list of headwinds.

The good news is that I am still convinced the drop is a buying opportunity as I am anticipating a year-end market rally.

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Motley Fool contributor Brendon Lau owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of Appen Ltd. The Motley Fool Australia has recommended Cochlear Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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