All Ords Report 05 September 2017

I understand the public outcry following revelations about alleged money laundering at the Commonwealth Bank and I’m one of those who can’t believe Australia’s largest bank can make such mistakes, however, as an analyst and trader, claiming compensation is going to be tough.

Maurice Blackburn is launching a class action against the Commonwealth Bank (CBA), to seek compensation for shareholders for a fall in CBA’s share price. The share price dropped when an announcement was released about AUSTRAC taking legal action against the CBA for breaches of anti-money laundering and counter-terrorism financing laws. AUSTRAC is Australia's financial intelligence agency and has regulatory responsibility for anti-money laundering and counter-terrorism financing. Shareholders are concerned that the CBA may face hefty fines.

The reason a compensation claim is likely to be tough is because of a principle in the share market, which demonstrates that all shares rise and fall within a certain frequency, called a cycle. It is a natural rhythm for share prices, where a cycle commences from a low price to a high price and back to a low. There are small cycles of just a few weeks to cycles spanning a year or many years.

What I know is that Commonwealth Bank started its yearly cycle in September 2016 before it rose to a high in April 2017 and since then it has been falling into the next low, which is due around mid-September this year. Now regardless of the news, this is what will occur with a high degree of probability. Therefore, how do you differentiate between what is the normal rhythm in the share price and volatility caused from an announcement?

Remember, having the knowledge to use cycles will allow you to develop powerful trading strategies, particularly if you want to learn how to generate an income from the market.

You may have already observed that, at times, share prices drop on announcements, particularly in reporting season, which commenced in August. But just how much of the recent decline in CBA’s price can be challenged in a class action is in the hands of the lawyers, who understand the legalities of these cases better than I do.

What do we expect in the market?

The Australian share market continues to trade sideways, keeping investors guessing. This tug of war, between financial stocks which have recently softened and materials and broader industrials that have strengthened, has allowed the market to remain between 5700 and 5860 points for three months, however, this is unlikely to last much longer.

Both sides will eventually march together and a move by the market in either direction will be positive for investors. The reason for this is, if the XAO drops below 5700 points we can say that a short dip into a two year cycle low is unfolding, with some of the biggest gains likely to follow thereafter. Whereas, a rise above 5860 points, which is currently my preferred view, would see the market continue to trade up quickly towards 6000 points. So, either way it is good for investors with a medium to longer term time horizon.

This is also an opportunity for short term traders with the knowledge to profit from a decline. In this market, it is important to be nimble as turns are likely to occur quickly.

Australian reporting season

The Australian reporting season confirms what I had already expected would occur. The Australian market had a reasonable result, aided by a lift in commodity prices. This is not a time to expect results that are ‘out of the park’ across the board.

Australian company profits, across the broader market, excluding resources, were in single digits, which is typical of a market in an ‘improving earnings’ phase. So seeing the data just confirms this.

The fact that our market has held up well for as long as it in recent times indicates that there is some underlying confidence in our market and I believe this has a lot to do with the view about our political environment. Australia represents a much lower risk than our overseas counterparts and business investment is reflecting this.

In summary, 67 per cent of Australian companies reported an increase in profits compared to the prior year. The positive for investors is that around 64 per cent of companies increased their dividend payout.

The results also demonstrated that 39 per cent of companies beat analyst expectations, which is slightly below last year, however, I don’t put a lot of stock in these numbers because the analyst expectations of company results rarely match what is reported. As an example, this reporting season only around 30 per cent of results came in in-line with analyst expectations, and this is the case more often than not.

Each year for the past 10 years, between 39 per cent and 55 per cent of companies beat expectations and between 20 per cent and 38 per cent were below analyst forecasts. This puts the opinions about the overall results in perspective.

Dale Gillham is Chief Analyst at Wealth Within