All Ords Report 27 April 2016
A sharp rise in the market has scuttled investor views. So, is the market going up, or is the rise a false trigger?
Commodity prices are rising. From 1 February 2016, to the time of writing, Oil is up 25 per cent, Gold 12 per cent, and Iron Ore 50 per cent. This means that commodity stocks are rising off lows, and other stocks are following.
As the Australian market contains many commodity related stocks, when these turn, the broader Australian index moves up solidly. However, I caution that sharp rebounds in prices are sometimes false triggers, followed by further declines.
Medium term investments
As an analyst, if I’m looking for medium term investments, I want to see changes in the medium term trend. To do this I apply trend lines to a monthly chart.
For medium to longer term investors, knowing how to apply this tool means that you’re not trying to jump in near the bottom of a run, but rather you invest during a safer part of any rise.
While rises like we are seeing can often signify a change in trend, and the current one looks positive for our market, never be fooled into thinking that prices won’t come back at some point. Only a fool would see something glitter and assume they’d struck gold.
That said, the recent rise on the All Ordinaries Index (XAO) has broken the trend line on my monthly chart, which indicates that the medium term trend has changed. Given this, you are likely to find some good medium term opportunities over the coming weeks. However, I do caution investors against heavily weighting portfolios to any one sector at this time.
You can apply trend lines
Many people are surprised when they see me demonstrate how to apply a trend line as there are a number of rules that must be applied correctly for a trend line to properly qualify as being accurate. Most people get this wrong without the proper training, however, getting it right will make a massive difference to how and when you invest.
Also, trend lines may be the key in determining a strategy to trade many stocks well, which is even more of a reason for you to want to get this right.
When I learnt to draw trend lines I didn’t have a computer, I used a ruler and a pencil, and you can too. Some of the best examples of what can be done with a trend line are laid out for you in my book, “How to beat the managed funds by 20%”.
To demonstrate the application of a trend line, I have applied one to the chart of the All Ordinaries Index (XAO) below. Observe how the market fell from the April 2015 high and it attempted to rise to the angle of the line on numerous occasions, only to continue the decline. Recently though, the market has broken through this resistance line, which increases the probability for a continuation of the rise.
You can apply trend lines to your favourite stocks. I encourage you to do it.
What do we expect in the market?
Last week the All Ordinaries Index (XAO) continued through 5300 points, which you will recall from my previous reports, is an important level for our market. This move is confirmation that the yearly low occurred in February 2016 and therefore the market is likely to continue to rise over the coming months and into the second half.
Remember that our market can be quite volatile in the month of May, so rises may soften during that time. We will also hear more about the Federal budget over the coming weeks, which can often cause a stir in the market.
As mentioned, commodities are enjoying a breather and have risen much faster than anticipated. However, it’s not the initial rise off a low that’s most important to observe, it is the first of many signs to pay attention to after a major decline, including how the commodity related stocks behave when the short term profit takers sell into the peak of the initial rise.
For example, BHP has risen well off an important level at around $14 in January 2016 to trade just above $21. This is great for anyone holding the stock short term, however, BHP is still trading below an important downtrend line, and this may slow the rise. While BHP may continue higher over the coming weeks any rise needs to be tested, as mentioned above. Interestingly, the recent rise broke many analyst forecasts.
The US reporting season, still underway, started off better than expected, and this buoyancy in the American stocks has provided some short term support here. However, there are always surprises in any reporting season and last week saw a number of household names sold off, including Netflix. A significant number of US stocks will report this week so continue to observe.
Dale Gillham is Chief Analyst at Wealth Within