Where are ASX shares heading?
It's the question we'd all love to know the answer to at any given time. But in a year of turmoil like 2022, it would be even more useful to know.
While no one has a working crystal ball, there are observations that one can make to guesstimate which direction stocks might be going.
FNArena founder Rudi Filapek-Vandyck recently warned in a memo for his subscribers about a statistical anomaly that could worry some people.
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Something smells funny
Filapek-Vandyck's share market research company keeps track of buy, hold and sell recommendations in the industry.
After last month ended, he noticed something odd.
"As of the end of April, and with the S&P/ASX 200 Index (ASX: XJO) still within reach of its all-time high, total recommendations for the seven stockbrokers monitored daily by FNArena on 437 individual stocks comprise of 60% buys (and equivalents) versus less than 35% in hold/neutral ratings and sell ratings close to 5%."
So what's so strange about that?
FNArena started compiling these statistics 16 years ago, and the current proportion of buy recommendations is incredibly high compared to long term averages.
"The only precedent over the past 16 years occurred in 2011 when financial markets were gripped by anxiety that debt-laden Greece might turn into the bombshell that would cause the implosion of the European Union."
Filapek-Vandyck said such a record-breaking number of analyst recommendations to buy means one thing.
"Historically, such a large percentage in buy ratings — and respective low percentages for hold and sell recommendations — points to bear market conditions for the local share market."
Uh-oh.
Watch out for the economy and earnings
However, the ASX 200 has remained flat over the past 12 months.
It has not yet entered a true bear market, with "buy the dip" rallies coming regularly after pullbacks.
But underneath the relative calm of the ASX 200, some sectors have halved their valuations while others have thrived.
"The experience has been equally disheartening for the likes of Aristocrat Leisure Limited (ASX: ALL), Life360 Inc (ASX: 360), Tyro Payments Ltd (ASX: TYR)… and many others, while the likes of Perseus Mining Limited (ASX: PRU)) and Flight Centre Travel Group Ltd (ASX: FLT)) offset with stellar gains," said Filapek-Vandyck.
"Maybe it is this extreme polarisation that is fundamentally responsible for why stockbroker ratings are signalling bear market conditions while the index is not reflecting it?"
He suspects that many of those non-cyclical stocks have been oversold now and the depressed share prices don't "tell us anything about the future outlook".
While positive financials in August might revive the ASX's fortunes, Filapek-Vandyck feels 2022 is similar to 2011 in that a bear market can be triggered any time.
"We've now had the bond market reset and the inflation scare — next up will be global growth slowing plus the unknown consequences of liquidity withdrawal," he said.
"For the above signals to provide the same positive message to investors as they have done in the past, corporate earnings in Australia must show resilience in the face of ongoing operational challenges."
For now, Filapek-Vandyck recommends investors sit tight and "avoid profit warnings as much as we can".
"The macro picture remains all-important in 2022. Plus, I'd keep on arguing, a more conservative portfolio approach."
