Buying into the Stock Market with the Assumption it’s Cheap? — Caution!

Caution Buying Stocks Assuming They Are Cheap - Stock Market Investing

Ah dearie me.

We’re beginning to see why the market keeps rising despite the sceptical, the bearish, and the foolish.

I’ve been all three in the last few months.

ANZ supremo Shayne Elliott says half of his borrowers who deferred mortgage payments have not suffered a drop in income.

They took it out as a precautionary measure.

This is not to say there aren’t a lot of people suffering and in financial distress out there.

It just means the news is ‘less bad’ than outright disaster.

That’s been enough to lure strong buying back into the market…

The ‘good news’ is coming out now

Don’t forget the miscalculation in the JobKeeper payments either.

Presumably, the market had sniffed out that already too. Again — ‘less bad’ compared to outright disastrous.

Plus, we have the little wildcard of iron ore moving back toward US$100 a tonne.

That lifted the big resource stocks like BHP and Rio Tinto.

The previous expectation — even before COVID-19 — was for iron ore to drift back down to US$75 a tonne.

We can ‘thank’ COVID-19 in Brazil for that.

It’s helped take Australia to a record trade surplus in April.

That’s not all. The banks are so flush with cash and liquidity it’s dropping their funding costs.

That means they can bring down mortgage costs for their variable rates borrowers for market share, or buffer their profits. Either is better than the alternative.

What does this tell us? The good news coming out now is why the market has been rising.

That suggests to me we might be close to it petering out.

I’m sure you feel a lot more comfortable buying now than you did on 23 March. That’s usually a warning sign…

Same ‘price’ but less ‘earnings’ (P/E)

Here’s a useful chart to keep an eye on. Check it out…

Profit watch

Source: Bloomberg/Montgomery Investment Management

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The market is still trading on a P/E ratio of 18 — the same as it was in February. Except: see the blue line?

That’s the estimate for company earnings going down.

If you buy the market today, you’re paying the same for less than at the start of the year.

Then I saw this too…

I am starting to wonder if the mums and dads who normally bet on sport are having a flutter on exploration stocks while sport is in hiatus.’

The CEO of an Aussie exploration company is quoted as saying this in today’s Australian Financial Review.

That’s because a couple of resource stocks — Alkane Resources and Magmatic Resources — that released good results have had a nice rally on the market.

This suggests to me the crowd might be speculating a little too much.

I’m not familiar with either of those stocks above. But I can point to another one.

I have gold explorer Great Southern Mining Ltd [ASX:GSN] on my watchlist.

On 8 May it announced a placement to raise $3.15 million at 0.045 cents per share.

It’s practically gone straight up since. Take a look…

Profit Watch

Source: Optuma

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Gold stocks have the eye of the crowd at the moment.

Don’t get me wrong. Great Southern appears to have some compelling targets.

But I do wonder how many buyers appreciate the geology of the projects compared to simply piling in to the latest ‘hot sector’.

A little caution never hurt…

I’ve seen it all over the years.

Lithium, blockchain, rare earths, crypto, gold, tech…every sector rotates through hot and cold…and fads.

The art of speculation is to ride these waves as they appear…in the full knowledge they will flag eventually.

It does make me wonder about the broader market though.

How many people are piling into stocks on the assumption they’re ‘cheap’ or ‘down’?

I’ve had a few people approach me about getting into the stock market now.

All I can say is I have my nose in the air…something tells me everyone is a little too benign on the stock market right now.

That’s not to say there aren’t individual opportunities…but don’t be blasé either.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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