All Ords Report 25 May 2018

A string of takeover offers have been knocked back by Australian companies, so is a trend emerging?

AGL rejected a $250m bid from now Chinese-owned Alinta Energy for Liddell coal-fired power station in NSW; the Santos Board knocked back Harbour Energy, the US private equity giant’s $14.4bn takeover offer for the company, which is a good decision in my opinion, and the Healthscope Board said the $4.35bn bid by Canadian giant Brookfield Asset Management undervalued the company and future performance.

These are important signs, as mergers and acquisitions typically occur when markets are strengthening and I believe this is the tip of the iceberg. It’s great for investors, as the excitement of an acquisition supports higher stock prices.

It’s exciting to see company boards making strong decisions in support of shareholders. This is another sign that aligns with the phase I believe our market is in right now. You may recall I mentioned that we are in an improving earnings phase.

When big private equity companies are on the acquisition trail, so should you be.

I’m not suggesting that you buy the companies mentioned above, as you need to have rules to buy when the time is right. And never buy unless you know how you’re going to sell, otherwise you may break one of the golden rules of investing, which keeps you safe. You see, many investors find it much harder to make that decision after they’ve purchased a stock.

If it is your desire to be truly wealthy, then you need to start making decisions that will get you there.

There’s a saying that states: there is a great difference between playing to win and playing not to lose.

If you want to win at anything, you need to embrace the principles of Be, Do, Have. In trading this means that you first need to Be the trader in your own mind, as this will allow you to Do what a successful trader does, so that you Have what a successful trader has.

To achieve this, you not only need to gain the knowledge and experience that will allow you to analyse stocks to a high level of competence, but also have confidence in yourself and your thought processes. To be truly successful, you must treat trading like a profession rather than a game because successful traders are simply ordinary people, doing the extraordinary.

Indeed, those who have achieved long term success as a trader consider learning to be an opportunity rather than a cost. They believe that paying to gain an education is a real investment in themselves that will pay off in the long run.

If you want to play to win, I encourage you to purchase my newly published book, Accelerate Your Wealth—It’s your money, your choice, which is available from all good bookstores.

What do we expect in the market?

Following the decline from the high in January of 6,256 points, the All Ordinaries Index (XAO) has managed to bounce back strongly just below this level on 15 May 2018. Our market has earned a break, and so it’s good to see the All Ordinaries Index (XAO) pull back this week to a low of 6,120.8 points.

At the time of writing, the market was trading slightly above this level at 6,138.6 points. Given the strength of the prior rise, my analysis indicates that the market is likely to soften further over the coming weeks as we head towards the end of the financial year. Remember, savvy investors make investment decisions based on rules, not for tax reasons.

The market has risen longer in time and price in May than the analysis indicated would occur. While it is common for the bears to come out in May and June each year, this year the bulls have taken control.

The market now needs to pull back for a couple of weeks to build support for the next rise towards another important level at around 6,450 points.

Keep an eye on areas of the market that have been sold off heavily, as eventually they will present opportunities to buy.

Global markets

Last week my Senior Analyst, Janine Cox, presented on global markets at our Art of Trading Workshop. She demonstrated the risks in global markets and potential upside. It was evident how the Dow, FTSE, DAXX and HSI had all traded to new all-time highs this year, whereas, the Australian market still lags other markets and the All Ordinaries Index is yet to trade through the all-time high at 6,873.2 points in November 2007.

Concerns about US-North Korean relations didn’t dampen the US market this week. President Trump cancelled a US-North Korean summit late in the week. The Dow was holding steady at around 24,811 points on Thursday night. Trump issued a warning to North Korea that the US military is ready in the event of any reckless acts by North Korea. You may have heard this statement on numerous occasions from the President. While some people may be fearful of the fallout, if the situation between the US and North Korea were to deteriorate, others have become numb towards this sort of talk.

What is interesting is looking back in history at the chart of the Dow Jones when some of the major wars broke. In 1950 when North Korea invaded South Korea (supported by the US), the Dow fell only by around 14.75%, but a greater correction had been anticipated by WD Gann himself, who used market timing to predict many major US corrections. Looking back at the chart, the correction Gann predicted would occur in around 1952 didn’t materialise.

You may like to look up the dates of major wars and compare the falls on the market around these times.

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

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Dale Gillham is Chief Analyst at Wealth Within