All Ords Report 27 October 2015
While many brokers are saying they do not expect commodity prices to stage a major recovery any time soon, there is talk of short term bargains for investors, as the sector attempts to find a bottom. So, is this time to jump into commodity stocks?
Firstly, the use of the word “bargain” conjures up images of merchandise sales, colourful signs advertising huge discounts, and shoppers scurrying to buy goods from their favourite retail stores. Perhaps you too have partaken in at least one stocktake sale, or you may recall seeing a news report showing frenzied shoppers pushing their way into a Myer store at the start of a stocktake sale. People do crazy things for a saving!
When it comes to the share market this isn’t the image you ought to be thinking about, nor should the words “share market” and “bargain” appear in the same sentence. In my experience, when these words are used together, it ought to make the hair stand up on the back of your neck because this really means “buyer beware”. Let me explain….
A bargain would imply that you are getting something at a discount. However, just because a stock sold for $5 six months ago and is now selling at $2, doesn’t mean you stand to pocket the difference. The shares may take more years than it would be worth your while holding to reach $5 again, or worse, they may continue to fall. This is where a lot of investors have come unstuck through buying into commodity related stocks, which have fallen to price levels that you may never have considered possible.
There are usually good reasons why shares fall in value, including that company earnings are down. A big fall simply tells the savvy investor to either steer clear and ignore the share, or consider with caution and only buy when the probability of a turn in the share price is near.
Commodity prices have fallen over the past few years; oil is down by around 60% since mid-2013; interestingly iron ore is also down by this amount; and gold is around 18%. Further, these three commodities are down by around 61%, 70% and 40% respectively from prior highs in 2011. However, this doesn’t give you the whole picture, you really need to look at three areas, which I will come to shortly.
Click here to hear more about the gold price and whether it may have bottomed. My analysts will update their view on the other commodities over the coming month.
Of course, related stocks have fallen with the commodities, and to different degrees. Remember, typically these stocks tend to be more volatile in price than companies in other sectors, such as Financial and Property, and the level of volatility can increase significantly the further you look outside of the top 100. Therefore, the larger commodity stocks including oil and gas company Oilsearch (OSH), iron ore miner Rio Tinto (RIO), gold producer Newcrest Mining (NCM) are the ones to have on your list.
Your goal is to identify better times to invest in these companies, when the probability of a rise is high. So, how do you determine when a bottom is likely to be in?
Here are three little share market tips to assist you to identify the turns:
- Use a monthly Price chart to identify long term levels where buyers and sellers have found agreement in the past, as this is where price will often reverse, and more importantly, this increases your probability of buying at a time when the share price has stopped falling.
- Learn to also identify Patterns, as these give you clues about whether a share price is likely to be at the start, middle, or end of the longer term rise or fall.
- Time is often used as the reason not to learn to invest, however, time can make you money if you use it wisely as Time analysis provides you with dates when the market is likely to turn.
Knowing these three areas of analysis means that you could simply ignore all of the opinions from the financial industry on China, the US, unemployment, business confidence, balance of trade, manufacturing, economic policy, the Australian dollar, gold, oil, iron ore, and the list goes on. How much time would that save you? Also, think how much simpler investing would be.
In my opinion it would be high risk to make investment decisions based on a broker’s opinion. However, currently my analysis does indicates that a bottom may be confirmed over the coming six months for commodities like iron ore. Given this, and as it is important to buy individual stocks based on merit and provided Price, Pattern and Time are aligned, now is the time to get your analysis up to date on commodity related stocks on your watchlist.
Click here if you don’t have the knowledge yet and would like to learn how.
What do we expect in the market?
Last week the Australian share market closed up strongly at 5388 points, which is a good sign and increases the probability for a further rise over the coming months. That said, the market is currently trading at an important level of resistance at around 5400 points and therefore we may see some short term weakness before it moves ahead to clear this level. A fall below 5150 points would be cause for closer scrutiny.
The recent recovery locally was due to a combination of reasons both locally and abroad, including seller exhaustion during August and September for Australian shares, and short sellers unwinding their positions as our market dipped into a major support zone. Also, news around the Chinese economy continued to be sombre and given this is ‘old news’ the market appears to be taking updates in its stride, meaning, it’s already been factored in.
Further to this, positive data emerged from the US, with confidence in home construction climbing to a 10-year high. We also heard a representative from the Federal Reserve (FED) say that a rapid rate rise would be unlikely, which seemed to support equity markets globally. That said, the wording of these comments indicate that we cannot completely rule out at least a small rate rise this side of Christmas. However, currently I believe the FED are more likely to make their move in February.
Locally, business confidence has apparently improved, according to the latest National Australia Bank (NAB) survey, however in my opinion we need to see more spending on infrastructure over the next couple of years to really give the economy a boost. That said, this process needs to be planned well as governments are notorious for overspending.
All in all, what do the economic events described indicate about where the market is likely to be headed? Very little really. Compare this to the summary of my analysis on the All Ordinaries, which I share with you in every issue. This analysis indicates that we are likely to see some great opportunities in the market in the coming year, so now’s the time to get the knowledge and prepare to take advantage of what’s ahead.
Dale Gillham is Chief Analyst at Wealth Within