General | Feb 04 2006
Catching a cab to work in 1987, I was forced to endure a lengthy diatribe from my driver about how much money he was making in gold stocks. It struck me as strange that a mere cab driver (and I mean no offence) was also a supposed stock market expert. Not long after came the October crash.
It is a long understood phenomenon that the herd money only comes in at the top of the market. These are the investors who know little to nothing about the stock market, but have seen enough on the news to know everyone else is making money and they’re not. The only thing to do is get in now, doesn’t matter into what, before they miss out anymore. This is when experienced traders think about selling.
Stockbroker Marcus Padley, writing for Tolhurst Noall, has noted in its newsletter that exactly this sort of phenomenon is beginning to occur. For starters, he relates that he just bought a stock because a mate said “get on”, which then doubled in price, yet he actually knew nothing about the company.
Padley also has clients he hasn’t heard from for six months ringing up wanting to “buy something”.
And it doesn’t end there. Consider, as Padley relates, that uranium stock Encounter Resources (ENR) listed at 20c and hit 115c the next day. Toro Energy (TOE) listed at 25c and hit 160c. The ASX wants to buy the SFE. There are $20 billion worth of takeovers and IPOs happening presently.
And that someone has been heard using the phrase “overbought does not mean overvalued”.
We are in a resources boom, and now uranium is adding further fuel to that fire. We also have an M&A boom amongst industrials. Apart from uranium, there’s a familiar ring. Corrections usually occur, notes Padley, every six months. The last one was five months ago. Are we due for a big one?
Marcus Padley is expecting a correction next week – before Easter. But don’t despair, as he is not expecting a crash. Crashes do not occur very often (about 0.01% of the time) and there are several reasons Padley throws up as to why any correction is unlikely to be the big one at this stage.
The average PE at the moment is 14.8x. The ten year average is 15.3x. Before the ’87 crash PEs were 21x, up from 14x in one year.
In the five years before the ‘87 crash, the market rose 337%. In the last three years it is up only 58%. Crashes pretty much need to be led by Wall Street. The Dow Jones is up only 20% in five years.
We had two corrections last year – one of 8.3% and one of 6.5% – and in both cases new highs were formed within weeks. A correction at this point will probably be seen as a good buying opportunity.
So you can rest easy – for now.
