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Rudi’s View: Bigger Picture – Trends

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Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Jul 13 2017

By Rudi Filapek-Vandyck, Editor FNArena

The below is merely a philosophical exercise, but one that hopefully plays a contribution in investors' ongoing quest to devise the best strategy for optimal investment returns in the years ahead.

All investors, no matter their age, level of experience or specific goals and mandate, like to think they are making decisions today for the long run. But in all cases shorter term considerations play an influential part.

So here's an attempt to keep things simple, devoid from short term noise and with lots of room to take different angles and opposing views and predictions.

Something to think about.

Below are four longer term price charts which I believe show the three key trends for ASX-listed stocks; the long term sustainable uptrend, the sideways pattern, and lastly, the downtrend channel. The latter is represented by two charts; one that is showing a rally from the bottom and one that is not.

As the old saying goes, a five year old child should be able to answer the most basic questions about each of these charts. For adults, the advice is KISS, otherwise known as Keep it simple, stupid! To make it easier to focus on the underlying dynamics, all charts show monthly price movements.

Also, to avoid early mental bias when looking at these price charts, I have removed specific company information. Instead, readers can find the names and stock codes of the companies shown at the bottom of this story. Don't look now. The info will still be there by the time you reach the final chart.

Let's start with the long term sustainable uptrend, which looks as follows:

Let's be honest, wouldn't anyone just LOVE to have lots of portfolio exposure to such long-winded uptrends? This looks like set & forget in its ultimate beauty, like a Picasso on the wall or an old photo album with parents and siblings.

Here the sad observation is not many investors stay the course or get on board. Instead they fret about things like "has it run too hard already" or "is it too expensive"? It's amazing how many investors would have been put off throughout the period because they couldn't get in at 50c cheaper, or because the Price-Earnings (PE) ratio looked too high. Meanwhile, the trend just kept going. It is still going today.

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Next up is the sideways pattern, which is what happens when prior up trends are no longer supported and management at the company has to pull all available levers to protect shareholders from too much downside.

Every day investors and commentators can debate whether the stock is cheap/good value/old glory/riskier than what it seems, etc but beyond all the pros and cons, the observation remains that a sideways channel has formed and the share price is simply moving between bottom and ceiling, up and down, and then again.

You'd hope these stocks pay a good dividend, or otherwise that shareholders climb on board near the bottom of the channel. Of course, the more active traders among us might device specific Buy & Sell strategies based around the existence, and endurance, of the sideways channel.

We can all speculate about when/whether the share price shall move outside of the channel, either way. Right now, it seems to me there's little indication on that chart any break-out is imminent.

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Downtrends are the most obvious value trap in the share market. Falling share prices make them look cheap, thus more attractive. One can only imagine how much money has been poured into the stock below, for those exact reasons. Is this the right time to remind us all that a recent study by Goldman Sachs showed that 60% of all stocks that fall in price, actually deserve to become cheaper?

Stocks in a long term downtrend are the stark reminder that holding on to a failed investment is not the right cure. Time does work to the benefit of the patient investor, but not in this case. Here any dividends are merely a band-aid; worst case they act as an instrument for self-delusion that all shall be right in the end.

Of course, every trend can, and probably shall come to an end, eventually. And this would apply more to down trends than to the two previous alternatives. Which is why we have a second chart which shows exactly that. All kudos to those investors who jumped on board near the bottom. But do we have a sustainable new trend as yet?

One easy to make observation is that past performances would have been best served by lots of exposure to trend number one. One pleasant additional observation, from my personal perspective, is that most stocks included on my list of All-Weather Performers are supported by price chart version number one.

As things stand, the price chart for the long term sustainable uptrend is provided by CSL ((CSL)), but it could just as easily be Amcor ((AMC)), InvoCare ((IVC)), REA Group ((REA)), TechnologyOne ((TNE)), et cetera. Paid subscribers can look up the full list, including past performance and research on the topic via the dedicated section on the website.

The sideways pattern shows the CommBank share price since 2011, but it might have been any other bank, really. Or Wesfarmers ((WES)), or McMillan Shakespeare ((MMS)) or G8 Education ((GEM)).

The two down trend examples represent Flexigroup ((FXL)) and BHP ((BHP)) respectively.

As said in the opening sentences of this story: these observations are merely bigger picture, underlying long term directional picture, but surely all of the above should be part of future considerations?

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

P.S. I – If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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CHARTS

AMC BHP CSL FXL GEM IVC MMS REA TNE WES