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All Ords Report 23 February 2016

Headlines like “Time to look to more defensive assets....” drive investors to park money in bank shares. However, banks have been falling, so is this wise?

Firstly, if you’ve been watching the big Aussie banks you’ll know they’ve dropped from 2015 highs, by between 27 and 41 per cent, more than the market which has fallen by around 20 per cent. This demonstrates that banks are not always defensive assets, and there are better, lower risk times to buy bank shares. Also, some banks fall less than others.

To illustrate this point, to date, Commonwealth Bank of Australia (CBA) has fallen the least, Australia and New Zealand Bank (ANZ) the most.

If we also look to the second tier banks like Bank of Queensland (BOQ) and Bendigo and Adelaide Bank (BEN), the results have varied here too. To date, BOQ has fallen by around 29 per cent, while BEN’s decline was a whopping 41 per cent, the same as ANZ.

So although prices are lower today than in 2015, I wouldn’t rush out and buy lots of bank shares until lows are confirmed.

On the weekend, I held the full day Your Trading Mentor workshop and someone asked “when should we buy?” My answer was simple, which is, once we confirm that the stock or market has started the move up. I clarified this by saying that a few days or a couple of weeks off a low doesn’t confirm that the decline is over. Jumping in early can be a death trap for the inexperienced.

Using techniques that I teach in the Trading Mentor course we looked at how you can increase your probability of getting in at the right time.

Some investors have turned instead to capital notes.

In recent years, banks have issued notes to strengthen their books, with CBA providing the most recent issue. So are these better than shares?

Well, opinions vary. Some brokers are positive about the issue, whilst others are not. Remember, one group is making money from the sale, others may work for an opposition bank, so do your research.

Capital notes offer good income, but a fraction of the capital growth of shares, so don’t let income be the only reason to invest. Although notes don’t fluctuate as much as shares, many investors find them complicated, so read the fine print, and if you don’t understand them, don’t invest.

Since the GFC, there are new clauses attached to those notes, which may mean that the issuer doesn’t have to pay the returns they advertise in the event these clauses trigger. Now as long as you understand this up front, and your risk, you’re investing with your eyes open.

Those who study my courses learn to think like a risk manager, and it’s not complex. Knowing this, the decision you make about where and when to invest in the market is likely to be different.

I prefer shares because they provide good capital growth as well as income. Currently, dividend yields on bank shares are attractive, and with some solid buy rules you can enter at a lower risk time for capital growth.

What do we expect in the market?

Last week the Australian share market rose with gusto, back above 5000 points. However, a few days up on the market doesn’t mean it will continue to rise.

There are a number of hurdles ahead, which are important historical levels of support and resistance that I’ve mentioned in previous reports, the first being 5150 points. The market must close strongly above this level and hold above 4900 points. However, secondly, the recent low of 4762 points cannot be confirmed until the market moves back above 5300 points.

The market will come back to the norm

That said, some stocks will confirm their lows ahead of this move, while others will lag. You may have heard me explain that generally when the market is behaving “normally” we will see one third of the stocks rising, one third falling, and the rest trading sideways.

In recent years we have seen this phenomenon, however, over the past few months the timing of falls in the mining sector and the financials have coincided to push this out of balance. However, eventually things will come back to the norm.

My analysis indicates that Asian markets are likely to rise over the coming weeks, and our market will follow. Even short term traders need to be mindful that there may be a retest of the recent lows, and therefore caution is required over the coming months.

This month, the Australian market fell to a low of 4762 points which is slightly short of the level I had identified at 4750 points. This is the mid-point of our target range for the low, between 4850 and 4650 points. Given this, it’s important to be mindful of the risk for a further short dip.

Reporting season tells all

It will be interesting to see what the US Federal Reserve decides next month and how markets hold up, so pay attention. However, my focus recently has been closer to home. This reporting season many Australian companies have performed better than analyst expectations.

While the market severely punished some stocks for disappointing results, including Computershare (CPU), in the main, the results to date indicate that we are in the ‘improving results’ phase of the market. So, once again, the analysts/commentators have got it wrong. To attest to this repeating, I have a graph going back some years showing expectations prior to reporting and how the market actually fared.

As we get closer to mid-year you will find it interesting to hear more on this at the Friday night session of the Art of Trading workshop in May. Every year I hold this event for past and current students of the Diploma and Advanced Diploma of Share Trading and Investment, however I open up the Friday night to everyone.

Currently, my analysis indicates that the Australian market will change direction this quarter. Also, remember, not every stock has mirrored the market’s decline. Many stocks have actually been rising. This is where having solid rules for stock selection, and your entry, will minimize risk and make your portfolio more defensive.

Now is the time for traders to finalise their analysis and trading plans in preparation for the next rise. Above all, remain patient and let the stocks on your watch list prove it will rise.

Dale Gillham is Chief Analyst at Wealth Within

All Ords Chart 23 February 2016

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