All Ords Report 22 November 2017

Long term investors are not always rewarded for loyalty, instead you may be forced to sell your shares.

This can occur if a company you have shares in is to be taken over by another company. A takeover announcement can lift a share price by around 20 per cent and in some cases more. If the price offered is at a premium to what you paid per share you may be happy about handing over your shares. Also, if you sell your shares in a takeover you don’t pay brokerage. But not all investors are likely to be cheering.

Following the GFC, an investor contacted me after he decided to purchase my book. He had invested in a mining related company prior to the GFC with no knowledge about risk management and held the stock through a decline of 90 per cent. The book changed the way he thought about the share market. He learned how a simple trend line would have given him the opportunity to exit with a profit. But most importantly, he’d still have all of his capital.

Having taught this technique to students over many years I can say honestly that it’s not rocket science. So if you are serious about wanting to ensure you avoid big losses like this when the next major market decline unfolds first learn how to make educated decisions from a qualified practitioner. Getting this step wrong can be costly.

I’ve seen plenty of cases of the blind leading the blind on so-called trading websites so think twice about trusting free information.

Also, remember that your prior level of education isn’t the determinant of whether you will be successful. The key to your success is your willingness to have an open mind, invest in yourself and be a sponge until you’ve mastered it.

Just to add salt to this investor’s wounds, the company whose shares he held received an official takeover bid by an overseas company after the shares had started to recover. The board gave their approval for the takeover to proceed and shareholders were given the opportunity to sell their shares at the offer price. Once a company receives a majority holding under the takeover rules all remaining shareholders must sell their shares. So he had to sell at a considerable loss.

What I’ve found interesting is that as commodity prices began to recover many of these unloved shares began to rise quite strongly and the charts indicated that a long term low had occurred. From a technical analyst’s perspective this indicates that the stock had the potential to rise much more than the offer price.

What do we expect in the market?

Following a solid rise on the market to a high at 6,124 points on 9 November 2017, the market reversed to close at 6,038.3 points last week, above the all-important 6,000 points level. It was interesting to observe the All Ordinaries Index (XAO) on Thursday as it dipped below the 6,000 point mark before attempting to recover on Friday. While this is positive for the market, the rise may have been short-lived as short term traders appear to have driven the market higher under the influenced of a strong rise on the US market the night before.

Short term traders will often chase gains made on overseas markets by assuming the local market will follow suit, however, a solid rise on Wall Street is not always reflected on the Australian market the next day.
From here, I would prefer to see the market take a breather for two or three weeks, prior to a further rise into the short term target zone between 6,200 and 6,400 points. That said a further temporary move to the downside would be normal at this time.

Another interesting point to bring to your attention is how the recent rise on the market surpassed the high achieved by the All Ordinaries Index almost ten years ago at 6,059.50 points in May 2008.

Looking back, 2008 provided an important lesson as the herd, which is largely comprised of investors with no or very little knowledge about proper buy and sell rules, decided to jump into the market as many shares were trading below their highs and the market had been rising again. However, their lack of knowledge soon became alarmingly apparent as the market continued it’s overall decline.

The important lesson to remember is that regardless of the current market conditions, if you have money invested you need a plan and proper rules to manage your risk. Furthermore, remember that diversification, which you may have been told is the Financial Industry’s answer to any risk management question, however this didn’t prevent the carnage that occurred in the GFC. So unless your plan includes a better risk management strategy such as a stop loss, history will repeat.

Global news

Perhaps you may have observed the activity around Oil over recent weeks. From a price perspective, oil has held up well following the rise above a prior level of resistance at around $52 in September. From there oil has to date gained around 8 per cent. My analysts indicate that following potential short term downside the target for oil is between $60 and $62, followed by $68 to $74 medium term.

The AUD has fallen swiftly against the value of the USD. Lows can occur between October and January on the AUD and therefore the current move down appears to be a well-timed decline. If a higher dollar is important to you, consider that while the dollar is falling it is possible for the currency to continue to the decline to between $0.745 and $0.75 over the coming weeks. My current worst case is around $0.742.

To confirm the start of the next rise I would look for a strong rise back above $0.775, however, this would be early confirmation of a potential directional change for our currency. So pay attention to commentary by the Reserve Bank of Australia (RBA) at their next meeting if the dollar does continue below my target range. More on this commodity in future reports.

Dale Gillham is Chief Analyst at Wealth Within