Technicals | Aug 25 2015
By Michael Gable
To quote Ron Burgundy from the movie Anchorman – “Boy, that escalated quickly… I mean, that really got out of hand fast.” And so it sometimes goes with the market. If we look at market corrections where it falls more than 10%, we have seen that happen 39 times in the last 70 years. Maybe the bears and Harry Hindsights coming out of the woodwork now are onto something. Call a market correction and the odds are within two years you can claim to be a genius. Those are pretty good odds.
But sitting in cash forever and a day isn’t investing, its not how you make money over the long term. Every man and his dog are giving an opinion right now ranging from “the world is ending", to "the buying opportunity of the year” and of course we will provide our input. Although some have short memories, this current dip now looks and feels like 2011.
We have included an ASX200 chart of 2011 in today’s report and compare it with where we are right now. Aside from the charts, we don’t believe we are entering a bear market now. The key points were covered nicely by Dr Shane Oliver from AMP so we thought we’d quote him here summarising why:
“Put simply shares are not seeing the sort of conditions that normally precede a new cyclical bear market: shares are not unambiguously overvalued; they are not over loved by investors; uneven & below trend growth is extending the economic expansion cycle; and monetary conditions are likely to remain easy for a while yet”.
With this in mind and our charting comparison in today’s report, it is a case of catching the bounce for the quick and easy profit, and preparing for the “second chance” dip. Beyond that, it is also turning a blind eye to the market and concentrating on the quality stocks.
This is the strategy: With the market likely to find a low any day now, the strategy would be to look for the buying opportunity to commence the fight back, not joining the panic right at the low point. The stocks likely to bounce violently are the big cap stocks, especially those with a yield. The other stocks that are likely to do well over time are those that reported well in the last few weeks, not the ones that reported badly and were sold off. So when the market turns, we can buy these stocks, possibly funding them with the "bad stocks" if need be.
After an initial bounce, any laggards can potentially be sold at better levels than today and the second chance dip will provide the next buying opportunity to see us through for months to come. The concentration on the large yielding stocks and those that reported well give us the best chance to outperform the market bounce.
The first chart here is that of the ASX200 in 2011. It was back when Greece was in danger of leaving the Euro and the market was concerned with “contagion”, that is, the risk of other countries doing the same. Unlike today, Portugal, Italy, Greece, and Spain (the PIGS, remember?) had seen borrowing costs escalate to unsustainable levels.
We had our initial pullback in the market in the order of about 10% and then it started showing signs of stabilising and resuming the uptrend. This has been circled on the chart here and labelled “1”. Instead of rallying though, the market started to fall again. It had been about 4 months since the last market peak and to see it sliding again caused some panic, which escalated, and the market then very quickly lost another 15% in the space of a week.
On 9 August 2011 it hit a low of 3765 in the morning before finishing at 4034. A week later it was trading at 4300. This is labelled as “2”. When markets move in a straight line, they often reverse that with the same enthusiasm. As is often the case, this initial bounce is followed by a retest of the low a month or so later and with the passage of time for people to clear their heads and be a little less emotional, “value” is suddenly staring them in the face and the market resumes the uptrend.
When we look at the market today, we can see similarities. We took a hit because of concerns with Greece but then we started to show signs of stabilisation and a readiness to move higher. However, all of a sudden we get into a panic about something else and the market rapidly falls in a straight line to extend losses which started about 4 months ago. So the last few months were the stage 1 of our 2011 chart, and we are currently in stage 2. So at some point when a low has been found, we will see a great rally for a week or two, a slow drift back and retest of that low, and then a resumption of an uptrend. That is the point of the greatest opportunity and upside.
Content included in this article is not by association the view of FNArena (see our disclaimer).
Michael Gable is managing Director of Fairmont Equities (www.fairmontequities.com)
Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.
Michael is RG146 Accredited and holds the following formal qualifications:
• Bachelor of Engineering, Hons. (University of Sydney)
• Bachelor of Commerce (University of Sydney)
• Diploma of Mortgage Lending (Finsia)
• Diploma of Financial Services [Financial Planning] (Finsia)
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2
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Disclaimer
Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.
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