US stocks rally into the close, up 4%, lifting ASX futures 83 points higher

Two days is a very long time in this market. At 5am on Tuesday this week, the ASX 200 SPI futures hit a low of 4,733. At 7am this morning, they closed at 5,208, just 19 points shy of their session highs of 5,227. It is so important to listen to the market at times like this and ignore the headlines, which over the past few days schizophrenically leapt between Armageddon and euphoria - all the while Rivkin's analysts remained focused on the market's key levels, the fundamental drivers of what creates buying in this asset class and what corporations stand to lose from darker investor sentiment. And I might add that we are not in a position to conduct a post-mortem of this volatility, because there's no suggestion that it's over yet - in fact last night's huge rally is just further evidence of its existence; however, as has been the case ever since the theme of ultra-low interest rates has prevailed in developed economy since the GFC, we can become more and more confident that rapid buying will emerge to diffuse panic selling in an environment where the world's global financial system IS NOT systemically imploding, as was the case in 2008.

In today's first chart I've plotted the ASX 200 futures (orange) versus the S&P 500 futures (black). Referencing the left hand axis, you can see that ASX futures are at levels not that dissimilar to before all of this started. S&P 500 futures--and you'll find no great discrepancy between it and the Dow Jones Industrial Average at present--haven't recovered as quickly and this is probably because US investors are well aware that they are not quite in an economic upswing that might otherwise justify the earnings multiples that their major indices are exhibiting.

The third chart is a daily illustration of the S&P 500's trading activity. I don't want to rain on anyone's parade, but, to me, last night's move upward looked too impulsive and it may be the case that this market chops its way back down to its 52-week low of around 1,800, which is about 140 points or over 7% lower than where it is trading presently. At times like this when short-term sentiment overwhelmingly overpowers fundamentals, I do believe that it is important to monitor and understand key price levels in Australian and US equity markets, something that Rivkin's Global Investment Director Oliver Gordon does every morning by video. If you'd like access to this, please phone 1300 748 546 or email customerservice@rivkin.com.au and enquire about access to Rivkin Global. When markets switch direction on a daily basis it can make short-term trading extremely difficult, but I am very pleased to say that the Rivkin Global model portfolio has been (with light exposures) on the right side of the market throughout August. 

In today's last chart I've illustrated something that I feel is quite important in conservatively setting expectations for investors. This was the 2011 patch of volatility that I have been using as a reference point for the current volatility. You can see that the implied level of S&P 500 volatility, illustrated using this VIX chart, remained unusually high for about five months. Now as we always point out history is not an accurate tool for predicting the future; however, periods of elevated uncertainty can last for some time before markets normalise and given the issues that seemed to have caused the latest uncertainty--China's contracting economy and volatile stock market, investments in emerging markets being vacuumed out and put back in risk-free US assets and a global commodity downturn--are not going to turn around overnight like the Dow did yesterday. Remember that Rivkin measures its performance in years not days, and you should be prepared to employ that discipline if you are to keep a level head and a long-term focus throughout these patches.


Source: Rivkin, Saxo Bank

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This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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