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All Ords Report 06 April 2018

Australians just don’t want to let go of Wesfarmers (WES). While WES shares haven’t grown in the last five years, investors are undecided about the decision by the WES Board to divest Coles and they want to know whether to continue to hold the new WES?

The chart doesn’t lie. It indicates that WES has failed to break out of the range between $40 and $46 in five years. From a technical perspective, I have not seen a share price unfold exactly as WES has. It is odd. On each occasion that WES attempted to break above this zone it was subsequently sold down; the peaks occurred in August 2014, February 2015, October 2016, March 2017 and December 2017.

Given the poor performance in WES shares, I agree that the Board needs to take some action. But is it the right time to be divesting a defensive business unit toward more aggressive investments? Only time will tell, it is a risk, however, the economic signs indicate that conditions favour growth.

In 2007, WES acquired Coles for around $19 billion as the Board decided it was the right time for ‘consumer value based purchasing’ as this would provide an opportunity to build the defensive side of the business. However, times have changed and the Board has stated that the divestment of Coles will provide WES with an opportunity to generate higher returns, which can only be realised if the company can free up capital. Coles generates 34 per cent of the earnings and accounts for around 60 per cent of capital. Therefore, 40 per cent of the capital is generating the majority of WES profit.

If the current plan proceeds and you are a WES shareholder, you’ll want to know what to do after the Coles business is floated. Put simply, if WES subsequently rises, hold, using a trailing stop loss to preserve profit. There is a greater than 50 per cent chance of a share price falling significantly within its initial 12 months of listing. Therefore, if your Coles shares begin to fall, which I believe is probable, sell Coles and buy WOW.

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What do we expect in the market?

The Australian market started the week on a low, having fallen to 5,834 points on Tuesday, before it rose on Thursday above 5,900 points. The Australian stock market has taken its lead from the US, and short positions are being unwound as buyers look to enter at cheaper prices.

It was interesting to observe that the rate of decline slowed this week and was substantially less than what occurred in recent weeks, indicating that much of the selling may have exhausted. However, a cautious approach is required. While the two year low may have occurred this week, I would prefer our market fall towards a strong support zone between 5,750 and 5,850 points before the next rise.

What’s exciting is that the best opportunities typically present following confirmation of the two year low.

Global news

It is good to see global markets, such as the Dow Jones, taking a breather at this time. Since the high at 26,616.7 in January, the Dow has fallen by around 11 per cent at the time of writing. Expect US and Asian markets to be more volatile than the Australian market.

China has retaliated against US proposed import tariffs, with a plan to increase taxes on US imports. The trade war between the US and China has just begun and may intensify. Uncertainty creates volatility on the market. That said, the US reporting season is about to start and will provide a welcome distraction for global markets.

The Dow has formed a sideways pattern and is currently trading up from the low at 23,353 points in April toward 25,200 points. However, the risk exists for the US market to experience a further fall this year. A trade below 23,500 points would indicate that the market will continue to decline to between 21,500 and 22,350 points. This would see the US index trade back to the angle of the 2016 trend. Either way, there will be great opportunities for investors globally and locally this year.

In Asia, the Hang Seng is likely to fall to between 27,600 and 28,700 points in the short term. However, the current two year cycle (from low to low) for this market is strong and indicates that a further rise is likely to unfold when the current period of selling ends.

Also, We’ve been producing the share market reports on our YouTube channel, so remember to watch them to stay up to date.

You can also subscribe to be notified when we upload the weekly recordings!

So welcome to the Wealth Within YouTube channel!

Dale Gillham is Chief Analyst at Wealth Within

All Ords Chart 06 April 2018

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