All Ords Report 27 July 2016
Is the recent rise in the BHP share price a precursor for a strong recovery ahead?
While BHPís share price may be up by around 40 per cent from its low of $14.06 in January, itís still down by around 60 per cent from a major turning point of $45.30 in March 2011. So does this indicate a huge opportunity for investors?
Wise investors know that just because a share was once trading at a higher price doesnít necessarily mean that it will return to previous highs, and if it does the climb may take years.
The reality is that if you look at a historical chart for any stock on our market, most have at some stage fallen by at least 50% from a high, and all will do this at some point in future. The point is, you donít want to be in these shares during such a fall. Imagine the difference to your returns if you were out before the biggest fall?
Now, as an aside, I would like to share with you how in the majority of cases, a price chart will reveal at least one exit signal before a major decline. I am going a bit off topic here, however, if we looked at a weekly price chart of a stock that experienced a very dramatic fall in 2015, Slater and Gordon (SGH), you would have been able to exit prior to the initial drop using a trend line.
This rule I explain in my book ĎHow to beat the managed funds by 20%í. Well worth the read.
Letís get back to BHP. Conversations I have had recently with new clients confirm that they held onto BHP for years because of its status as a big company in the market, but many were shocked that it fell as far as it did.
The best thing you can do if you have shares which you are managing yourself and you donít have rules in place to minimize your risk is to either learn how to apply risk management rules, or find someone with the knowledge to do this for you.
BHP is still facing a huge settlement, in the billions, for the Brazilian mine disaster, but the main reason for the soft share price is the global commodities slump. Despite this, the market will at some point re-rate the shares higher. But when?
Currently, the market wants BHP for less than $20. However, provided BHP holds above $17.29 in the coming month, a rise to around $23 is likely in the short term.
What do we expect in the market?
The Australian share market has been riding on the coat tails of good US earnings results. The All Ordinaries Index (XAO) closed on Friday at around 5574 points and continued to rise at the time of writing to just above 5600 points. Finally, the XAO has traded into my short term target zone between 5600 and 5800 points, which is a really positive move for our market, US earnings season or not.
Our market is now moving in line with what the analysis indicated would unfold for the medium term, which is to continue to rise. That said, shorter term, the market may meet some resistance between 5600 and 5800 points.
In the coming month, the chart will soon allow me to firm up the next short to medium term target for 2016. The more data that appears on the right hand side of the chart the clearer this picture becomes.
Also, short term, what is really interesting is how typically the market will rise for less than 11 days before we see a day fall. The market moved up for 11 straight days from 7 July 2016. It fell on day twelve, Friday 22 July, before continuing higher this week. This is a good sign that our market is performing normally, not just in the medium term, but also based on short term activity.
Since the GFC hit, our market has experienced the roughest ride since the 87 crash, with both periods showing huge swings, of similar order, subsequent to the initial decline, which you will recall, wiped more than 50% from the bourse. However, after every major correction like this there are opportunities in the share market for many decades to follow.
So make good decisions about your investments based on rules and make it your number one priority, ahead of profits, to preserve your capital, this will keep you safe in the market and yield profits in the years ahead.
Dale Gillham is Chief Analyst at Wealth Within