All Ords Report 24 November 2015
This week the market experienced a “short squeeze”. What does this mean, and will your shares start rising?
When you think of a “short squeeze” you may be reminded of a time when your partner tightened his/her arms around you. However, the “short squeeze” I am referring to is share market lingo for what occurs when “short sellers” close their trades in numbers, also called “covering". Typically, the effect is that these shares being shorted rise, at least temporarily.
To close a short trade, you would take an opposite position in the stock or instrument being traded. Put simply, short selling is where you aim to profit from a decline in price. You open the trade a certain price and close it at a lower price. Whereas, profiting from a rise means you do the opposite. Sounds strange at first, however, with the right skills profits from selling short can flow faster than a rise.
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If the risk of a price rise increases a large number of short sellers will start “covering”. Prices start to rise and as more trades are closed then buyers looking to profit from the rise jump in. This change in view can drive a rebound, and is certainly welcome relief if your shares have been falling. Provided the rise doesn’t run out of steam and shares continue higher over the coming two to three weeks the market will recover as my analysis indicates is probable.
Further on how to profit from a price fall....
You may have heard of Contracts for Difference, or CFDs for short, which is how most people refer to them. With the right knowledge, CFDs are an incredible vehicle for generating an additional income stream from the market, from rises (called going long) and falls (selling short). Price falls can be very lucrative for traders as they typically occur much faster than the preceding price rise.
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The real benefit to you, once you have the right knowledge, is that you can gain full exposure to the price movement of an underlying instrument without paying the full price. Typically the margin required would be between 5% and 10% of the outlay to buy the same exposure in shares (the underlying).
Let’s consider BHP. If you purchased 1000 shares in BHP you would outlay 1000 times the current price. Put simply, if the margin for the BHP CFDs is say 10%, your total outlay is 10% of the total you would have paid for the shares.
Looking at the movement in BHP’s share price, we find that it fell from say the 29th of June 2015 at $27.20 to $20.50 on Friday 20th of November 2015. The fall in the underlying share price was $6.70 or approximately 24.6%; a great return in such a short time frame. To keep it simple, interest and brokerage have not been taken into account, however, this is something you will need to understand if you choose to explore how CFDs can assist you in building wealth in the market.
What do we expect in the market?
Last week, the Australian share market initially traded lower before closing strongly at 5305.5 points on Friday. My previous analysis indicated that a support level exists at around 5150 points and that a strong rise above this level would signify support for a further rise.
Provided the market remains above this level into December, your shares are likely to move higher towards the end of the year, increasing the probability of a further rise to between 5600 and 5800 points in the first half of 2016. The downside view shows that a fall below 5150 points would be followed by a decline to around 4750 points before the commencement of the next rise.
This week money is flowing into most areas of the market, including Financials, Health Care, Consumer Discretionary and Property. Interestingly, recently gold continued to trade lower, towards the target zone for the next low at around US$960 per ounce. You may have observed how commodity prices have been falling as the US dollar has been showing signs of strength in the lead up to a US rate rise. We have seen falls in Silver, Copper, Gold, Iron Ore, and Oil.
One interesting point to note is how Copper, often viewed as a gauge for economic health has been trading below 50% of its all-time high price of US$9880 per metric ton in February 2011, and currently remains on a downward trajectory. Whilst Copper may see short term relief, given that it has broken the 50% level we could see copper fall to the next level at around US$3780 in 2016. What does this say about economic health?
Put simply, while we are hearing less about Greece and global debt, this shows that the flow-on effects of the GFC are still lingering. Given this, it will be some years before the economic growth observed in many economies pre the financial crisis will return.
Remember, if you are keen to learn how to profit from the markets, the tuition fee for the Diploma and Advanced Diploma of Share Trading Investment will rise for enrolments commencing in January 2016. Therefore, now’s your chance to beat the price rise. Enroll prior to the 30th of November and save thousands.
Dale Gillham is Chief Analyst at Wealth Within