No rush to buy – Big Tech and banks hold the key

The VIX Volatility Index is a real-time indicator derived from the volatility of near-term S&P 500 options. It tells you what’s happening but has no predictive qualities — it is simply a calculation of volatility ‘now’, a measure that is back-engineered from options prices. It will change tomorrow.

But it is useful because it highlights changes in risk, fear, and stress (pick your word for not being able to sleep at night). More than any market index (like the S&P 500), its dramatic movements highlight when things change dramatically. It spikes. These spikes highlight ‘moments’ of rapid change in market thinking (like in the pandemic and last year in the Carry Trade collapse).

The interesting thing about the current rise in the VIX is that it isn’t spiking — it is quietly rising. That suggests that this is a ‘normal’ correction with a low level of precipitous risk. But whether that’s good or bad is uncertain. Spikes in ‘fear’ can unwind just as fast. This slow rise in fear is perhaps more meaningful. It suggests that this could be a more significant sentiment change, a more substantial market top, and the start of a longer-term downtrend rather than a repricing ‘moment’. We’ll see.

The current sell-off, mostly caused by a repricing of Big Tech sentiment, is unlikely to reflate suddenly unless it is once again led by a rapid reflation in Big Tech sentiment. As any kid will tell you, a balloon that has deflated is a lot easier to inflate again — it is much harder to blow up a new balloon. So a rapid market recovery would have to come from Big Tech. That would take an ‘event’ rather than a general sentiment change — something like reiterated AI infrastructure spending commitments, earnings surprises, or a sudden end to tariff wars — something real.

Without a meaningful change in Big Tech thinking, the chances are that when it comes, any bounce will be a slow bounce, not a fast bounce. It takes three times as long to build confidence as it does to lose it. The market never ‘crashes up’. Markets go up three times slower than they come down.

The bottom line is that you will have more time to buy than you did to sell, and without a dramatic change in Big Tech sentiment, there’s no need to rush to buy ‘the market’.

Global fund managers selling out of Australia

This rising volatility has coincided with significant shifts in global capital flows, particularly in Australia. The big falls in Australia’s largest stocks on 12 March — particularly the banks (ANZ -2.1%, BHP -1.8%, CBA -1.4%, NAB -2.1%, RIO -1.8%, WBC -2.0%, WES -2.6%, WOW -1.5%) — suggest that some large international fund managers are reducing their Australian exposure. This likely reflects concerns over global growth, Chinese economic conditions and commodity prices.

US brokers have been turning negative on Australia, and some major fund managers, including BlackRock and Bridgewater, have cut their Australian equity exposure. BlackRock noted that Australian equities are overvalued compared to international peers, with relatively weaker earnings growth. UBS has also flagged Australian equities as “too expensive”, given the softer outlook for earnings. The ASX is trading at nearly 18x forward earnings, above its 25-year average of 14.8x.

If a US (global) recession comes and China lives with 20% tariffs for 12 months, commodities, the Australian dollar, and the ASX won’t be going anywhere.

Tech and the magnificent 7 sell-Off

A Big Tech rebound is key to any market recovery, but recent price action suggests it won’t happen overnight. CNBC Fund Manager Quote of the Day on the Magnificent 7 sell-off: “You shouldn't be investing simply on the basis that share prices are going up”. Earnings are still important. The Magnificent 7 are down 13% year-to-date — Tesla (NASDAQ: TSLA) is the outlier — and all Q1 revenue guidance was downgraded after Q4 results. This sell-off is more than just sentiment — fundamentals are playing a role. Every share price is X% value and (100-X)% sentiment.

Nvidia (NASDAQ: NVDA) is approaching a “Death Cross” — an over-glamorised term for when the 50-day moving average drops below the 200-day moving average. The opposite is a “Golden Cross”. If you traded stocks based on these signals, you would likely go bust, as they typically trigger far too late.

Market correction and opportunities

At one point on 12 March, the ASX 200 was down 10% from the top, hitting a low of 7493 — officially entering a “correction” territory. It closed down 9.62% from the top at 7786. The All Ordinaries Index is 9.91% off the top, just holding on to 8000 at 8003 after hitting 7743 intraday.

The All Ordinaries Index is now oversold (RSI at 20, when 30 is considered oversold) and has dropped below its 50 and 200-day moving averages for the first time since December 2023. An opportunity is coming, but timing is key.

Banks: The most obvious opportunity

The recent market drop has been driven by the sell-off in banks. If you’re looking to take advantage of this, the most obvious opportunity lies in the banking sector. ANZ Group (ASX: ANZ), National Australia Bank (ASX: NAB), and Westpac (ASX: WBC) have results and dividends coming up in May. They are largely “tariff-immune”, and there is no reason for earnings surprises to the downside.

The sector is now oversold (RSI of 22). While Commonwealth Bank (ASX: CBA) has outperformed in the drop and remains expensive, the other banks are approaching attractive yield levels. Timing the bottom will be crucial. We’ll be keeping a close eye on it and will call it when we see it.

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This article has been prepared by Marcus Today Pty Ltd ABN 57 110 971 689, a Corporate Authorised Representative (No. 310093) of AdviceNet Pty Ltd ABN 35 122 720 512 (AFSL 308200). The information is general in nature and does not consider the financial situation of any individual. Past performance does not necessarily indicate future performance. Before making any financial decision, consider seeking advice from a professional financial adviser.