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Bad news sells but is tough on investors

Michael McCarthy
Thursday, February 28, 2019

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Given all the bad news about the Australian economy, how can the Australia 200 index be within 5% of a 10-year high point?  Locally, we’re looking at a cooling housing market and increased regulatory risks, as a result of Royal Commission Inquiries and the coming Federal election. The prevailing global story has Europe on the verge of recession, China cooling and the US economy about to tank, as last year‘s fiscal sugar hit wears off. Both individual and institutional investors are generally underweight stocks, and there is a lot of cash on the sidelines. Yet the stock market is approaching a post GFC high!

The problem is the narrative, not the market. This is particularly challenging for investors. Markets price the future and no matter how intelligent or hard-working, no-one knows the future. This means forecasters can be wrong year in and year out, sometimes without ever being called to account.

Much of the appetite for market bad news springs from our own biases and prejudices (obviously not yours or mine, but that of other investors). Impending disaster for markets that speaks to our patriotism, our jealousy of others’ success, or merely our taste for juicy gossip, catches eyeballs and clicks. Media organisations naturally favour stories that appeal to their readers, and the reality is that bad news sells. Higher quality media groups oppose this commercial factor by consciously seeking balance, and sourcing their content from a wider variety of contributors, but the torrent of information now available can sometimes drown out these more rational voices.

Further, there are commentators who also deliberately favour delicious disasters. The reasons relate to recent market history. The very few forecasters who correctly predicted the market crash of 2007-2009 were lionised; they are considered heroes by some. On the other hand, those taking a positive view are often dismissed as shills with a vested interest.  It’s apparently occurred to more than one bright young thing that calling the next market crash is a potentially career-making move.

In an age of distrust, it can be difficult to find the facts. But there is one source of opinion that is not only broad based, but assuredly sincere. Market prices represent a consensus that is backed by people putting money on the line. They combine the “wisdom of crowds” with higher incentives for being right.

Global copper markets are giving a strong signal right now.

Copper is a key industrial input. It’s used in everything from construction to computers. For this reason some professional traders use the copper price as a barometer of global industrial sentiment.

This weekly chart of the copper price over the last four years shows it breaking through a resistance level at US $2.84 a pound. This break is significant as since last May $2.84 snuffed out all previous copper price rises. In addition, the break comes after the completion of a “W” reversal pattern, a special form of a double bottom formation. This combination of factors is pointing to further significant gains for copper prices.

But it’s not just copper. Iron ore prices were boosted by the tragedy at competitor Vale’s Brazilian mine, but were already well off lows. Oil prices appear to have bottomed, and last week echoed copper’s moves higher.

What does this mean for investors? For starters, it suggests it’s not too late to buy resource stocks. There is no certainty in predicting the future, but the co-ordinated upswing in these key industrial commodities suggests the demand picture is stronger than the market narrative indicates. Resource stocks may continue to climb a wall of worry.

More importantly, there are broader implications of these price moves. The Australia 200 index has climbed through the 6100 level, despite widespread scepticism. The better-than-expected demand scenario could be an important market driver and may mean a test of the post GFC high at 6373 is more likely than a drop below 6000.  Investors who are underweight resources, or the share market generally, may want to shift their focus to price action rather than the stories of unreliable forecasters.

Published: Thursday, February 28, 2019

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