The Aussie market managed to put in a decent rally yesterday, despite coming off an average Wall Street lead. The ASX 200 managed to rally 1%, a solid effort, considering…
And where did the rally take us?
Right back under that resistance level (formerly support) that I’ve been talking about around 5,660 points. I wish the market would just make up its mind and move away from here so I don’t have to keep mentioning it. But the market doesn’t operate on anyone’s agenda, so I’ll just roll with the punches.
It’s on its way down again today after another dismal showing on Wall Street overnight. The NASDAQ lost another 2.27% and has now broken support, if only just. It’s not looking good, folks…
But let’s try and keep it slightly upbeat today, and ask what was behind yesterday’s surprise rally? I’ll then show you how to avoid buying into dud stocks.
Apparently, the prospect of tax cuts saw Aussie stocks rally. From the Australian Financial Review:
‘Australian shares rallied from an opening loss on Monday, rising on the prospect of additional tax concessions from the government in the next few months.
‘The federal government’s mid-year economic and fiscal outlook (MYEFO) published on Monday showed the government will unveil about $9 billion of additional tax cuts between now and next year’s election, and still achieve the narrowest cash deficit since the global financial crisis.’
Sounds like a flimsy excuse for a rally. In the scheme of things, $9 billion isn’t much. Someone worked out it amounts to a $6 a week average tax reduction. So the government is possibly going to allow the average punter to keep an extra $6 per week of their money, and it leads to a 1% jump in the stock market?
I’m not buying it. Especially given the fact that resource stocks led the charge today. The ASX 200 Resources index jumped 2%, twice as much as the broader market. That was partially driven by BHP Billiton’s 3.5% rally, a result of a special dividend announcement.
But that is no cause for celebration. Special dividend announcements, regardless of the sector, more often than not occur at the top of the market, not the bottom.
It’s also an admission by BHP that it has no worthwhile investments for its cash pile, and is better served handing the money back to shareholders. While that’s just sensible capital management, it also won’t do anything to get the market to price the company as a ‘growth’ stock.
Trading at around 13 times 2019 forecasts, BHP is firmly in ‘value’ territory. That’s the market saying there isn’t much more upside at this point in the cycle.
So what’s worth buying in this market? Anything?
I mentioned yesterday that at the first sign of a rally, investors’ hope and greed receptors will go off. They’ll go from freaking out and wanting to dump their portfolio to wondering what stock to buy — NOW — before they miss any more of the rally.
A decent rally is yet to kick off. But regardless, when you get the fever, here’s a quick and easy remedy.
The first thing you need to do is have a look at a chart. There are plenty of free charting sites out there, but I use www.bigcharts.com. It’s easy to use and you can create your own settings.
Then, when you start getting all giddy about the government graciously stealing $6 less of your weekly wage, and thinking about all that stuff people will buy from Harvey Norman and Myer with the proceeds, or the blackjack hands they will play at the casino…stop!
Before rushing out and buying shares in these companies that will OBVIOUSLY benefit from the government’s pre-election bribe, just take a deep breath and check out the chart.
This is how I do it. Firstly, let’s have a look at Harvey Norman (below). I immediately look at the chart and think, no I wouldn’t buy that stock.
It’s in a downtrend (as shown by the 50 and 100 day moving averages lines, and the fact the share price is making new news). That doesn’t mean the stock isn’t a good buy here. It could well be the bottom. But it’s a low probability bet buying while stocks are trending lower.
You’re better off waiting for the price to start moving higher, and for the trend to turn up, before buying in. Then, if the fundamentals are sound and the price is reasonable, you can go ahead and buy.
Look what happened back in August. The stock price surged and looked like it was going higher. But the moving averages hadn’t crossed to the upside, and therefore didn’t signal a buy.
Following this method would’ve saved you another move lower a few months later, as the downtrend extended.
What about Myer?
This is tougher because it’s just a stock I wouldn’t buy. The business is in structural decline, and you really need good management to run it. There’s been a distinct lack of that with Myer.
Anyway, based purely on the charts you would not have bought this for a long time. But in September the priced spiked on news that Wilson Asset Management took a stake.
The moving averages moved into an upward trend and things were looking good. But the fundamentals weren’t great. Myer is trying to shrink to profitability, a very, very difficult task.
As it turned out, the signal was a false one. This happens sometimes when the market is in two minds about an outcome. Myer has certainly fallen a lot over the years, and that always brings out the bargain hunters.
Still, it’s looking ugly now and I would not be a buyer here.
Casino operator Star Entertainment Group is also a no go, I’m afraid. The stock has been falling all year and is in a definite downtrend. The odds are just not on your side buying here.
Others would argue that the lower the price, the cheaper the stock and the better your odds of making money. While that makes sense, it doesn’t always work out. Cheap stocks can get cheaper. If you buy cheap and it gets cheaper, perhaps you panic and get out after another fall…and sell at the bottom.
This little investment short cut is all about improving your odds. The best way of doing that is to avoid stocks that are in downtrends. You’re not going to pick the bottom using this method, but who cares. No one can do that anyway.
It’s about waiting for momentum to be on your side. And when it’s not, you simply get out of the way and wait.
With support on the NASDAQ starting to give way, that’s exactly what you should be doing right now.
Editor, The Rum Rebellion