After a market crash, buy here


Hmm. US stocks up. Oil up. The world seems to be moving favourably.

Our position here at Profit Watch is simple: Buy the dip.

This morning, I read some good news that backs this up.

It goes back to the market moves before Christmas. Perhaps you weren’t even paying attention.

But it might be the most important signal for all of 2019.

And the time to take advantage of it is now…

Let’s put it into context first.

The US stock market got caned in the fourth quarter.

I double checked some numbers around this. There’s a useful idea that springs from it.

We’re going back three years here.

The Dow Jones index took a big dip into early 2016. It was a 12% drop.

I still remember it quite vividly. It was around that time that analysts at the Royal Bank of Scotland came out and said to ‘sell everything’.

They were expecting a deflationary winter.

It wasn’t obvious at the time, but it was actually a screaming buying opportunity. For example, in January 2016, a colleague and I put out a report about lithium stocks.

By April, some were up 200-300%.

But even buying an index fund was a nice little earner.

Out of that drop, from 12 February to 18 August 2016, the All Ords rose 16%.

Even better…the small-cap index rose 27%.

I did some more digging around this idea — chasing more ‘alpha’ in small caps after a market drawdown.

The Dow Jones took a 9% dip in February 2018.

The ASX All Ordinaries index rose 6.98% from 18 February to 21 June.

The Small Ordinaries index rose 11.5%.

The US market lost 19% in value from October to December last year.

Now it appears to be recovering.

This suggests a good time to scoop up small-cap stocks and back them to outperform.

The stage is set.

Of course, there’s no guarantee the US market will keep running up as it did in my previous examples.

That’s where my latest data point before Christmas comes into the picture…

The last time this happened was 2011

Steve Sjuggerud is an analyst for Stansberry Research, which is part of the same family tree as Agora Financial Australia.

One of Steve’s services uses computing power to analyse market data and trends to find notable exceptions based off history.

Here’s one of them…

On 24 December, the S&P 500 index in the US rallied 5% in one day.

That’s only happened 26 times since 1950.

Steve’s computers crunched the numbers around this. Historically, after the S&P rallies 4.5% or more in one day, the market rallies 6% in the following six months and 18% over the next year.

Naturally, there’s no guarantee that history will repeat here. But it’s another nice piece of evidence that backs buying this market.

I’ve said before that US stocks are cheap, based off historical valuations. And the US economy is chugging along, despite the bad sentiment.

A strong US sets the tone for the Aussie market.

I mentioned last week that traders were pricing in no rate hikes from the Federal Reserve this year. This is despite the fact that the Fed’s guidance is for two hikes.

The market is worried about a possible recession.

It’s a little less worried today than it was previously. The Wall Street Journal reports that Fed funds futures now show a 28% chance that the Fed will hike rates once by the time of its June policy meeting.

We’ll see.

Of course, all this is big-picture analysis. And while useful, don’t forget that when you buy a stock, you’re invested in the performance of the company first and foremost.

I can tell you from personal experience that many of the companies I track are releasing good news and positive developments.

For example, one of the small caps on my Small Cap Alpha buy list just announced the largest contract expansion it has ever had.

In fact, I think there’s something unappreciated about many small Aussie companies right now.

There’s a terrific bunch that are competing in the United States, and winning significant market share and contracts.

So don’t be put off if you think the Aussie economy is stagnating and the ASX is not doing much.

There are plenty of Aussie companies doing interesting and exciting things — all over the word.

And if the US market bounces back as I expect, more investors will start chasing them.

That’s when you and I can sell out — potentially at much higher prices.

All the best,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch