It's been a brilliant recovery over the last 10 days but where to now?
Before I answer that question, lets have a look at what's occured over the past month and how we have helped you.
The day before the fall
It all began on the 25th July when we were too nervous about the value of the market and decided not to give you a 'stock pick of the week' that week. Some might call it lucky but it just happened to be the day before the sub prime mortgage concerns hit home and caused the market to free fall. From our point of view, we had been having major trouble finding undervalued stocks for a few weeks and our smart money indicators were only finding mug money around. We couldn't see much upside.
During the next few weeks we supplied our you with loads of hints and tips from many different angles about what to do and what normally occurs in these correctional moves. Finally, on the 15th August, we could see signs of the end nearing and started telling you to get ready and look for bargains. The market had taken a huge beating and there were many stocks that appeared unfairly treated. As always when you look at events in hindsight, this looked like an easy call but at the time there was so much doom and gloom around that we even had professional peers call and tell us we were crazy. They were saying that the market still had a long way to go down. Luckily they were wrong - the market finished it's fall the next day.
Bargain Stocks Galore
This was one of the rare times that there were bargain stocks jumping out at us everywhere and we started feeding them to you by way of our Smart Money scans. We also introduced feedback from you, the subscribers, to give us your own stockpicks to share. This was a great success it added many stocks that we probably wouldn't have looked at.
Here are the results* of our picks over the last couple of weeks....
*Past results are no guarantee of future performance **Data as at 28th August 2007
It's been a fantastic time for all. We also noticed that Director activity increased to possibly the highest level since we started monitoring them over 5 years ago. Many of them were picking up bargains also and we gave you details on those stocks as well.
In just 7 trading days the market recovered a massive 500 points. Now who would have predicted that a few weeks ago.
Where to now?
The way we see it is that we are now at another crossroad. This last surge in the market has been great but, for the short term, it's probably not sustainable.
Technical resistance at 6200 points.
In the all ords chart below, you can clearly see that there is a support/resistance level around the 6200 point mark. This is a psychological barrier and will most likely prove difficult to breach. This is not just some technical analysis mumbo jumbo, support and resistance points do actually occur in the markets. Our market has tried 3 times in the past few weeks and every time it's fallen back.
Lets have a look some of the factors affecting the markets...
Positive Factors for the Market
The Australian economy is strong The weight of money. There is a huge amount of superannuation money that has to find a home each week. Resources are still strong - mainly due to growth in China India is also growing and will increase resources demand over time. Companies are generally reporting good profits
Negative Factors for the Market
The sub prime mortgage issue has permeated into world markets causing a global credit crunch. Central banks have been interveaning to prop up liquidity. The market has become more risk averse. Many hedge funds have lost a lot of money because they were heavily geared. There has been a flight to safety. The US economy has been tipped to slow. China's growth is linked to US consumerism. Housing affordability is at record highs which makes our market very sensitive to interest rate changes. There is a federal election looming with the possibility of a new labour governement. As you can see, there are many positives but there are many negatives. Nervousness is possibly one of the biggest issues at present because the markets haven't been in uncertain times like this for a long time. This nervousness has caused the massive volatility that we have seen over the last few weeks. I think this will continue for some time yet.
A few other points
The bears (people who think the market will go down) have been a lot more vocal recently as well. They are always around but there seems to be a lot more of them now. There's even an email going around saying that there has been almost $1Billion invested in some put options that will only make money if the market severely crashes. If it doesn't they will lose the lot. Speculation has it that a terrorist organisition has done this so thatthey make money when the market crashes due to some catastophic event. Now, I'm not telling you this to scare you as it is most likely a complete urban myth. I'm telling you because this is the sort of thinking that is around at present.
Just today (Tuesday 28th August) we noticed that although many stocks had increased recently, the Nielsen supply/demand indicator was falling on many of them indicating that the buyers were disappearing and the sellers were making a comeback. Now this is only a very short term indicator but it was worth noting.
What to do?
The answer to that question will depend on what sort of trader/investor you are. Of course, we don't know your specific circumstances so this is just general advice but we hope it helps.
Long term investors
Firstly, if you are a long term investor with money in a managed fund or a blue chip portfolio for your self managed super fund, the answer is probably do nothing. That is the standard advice for long term share investing. The market has been kind to us recently but it will always cause us some grief from time to time. However, history has shown that over the long term, in a stable economy like ours, the market will resume its uptrend at some time.
The most common mistake that many new investors do is to panic and sell when the prices are low only to see the market recover quickly. Then the next fatal mistake they make is to buy in at the top again. These responses are fed by our old friends, fear and greed and goes against the grain of the old adage : Buy Low; Sell high.
Short and medium term traders
If you are an active trader then this is a busy time for you and can be a very profitable one. Hopefully you always enter a trade with stop-loss orders in place. This is one of the cardinal rules for trading. If you haven't done that then you will have learnt your lesson by now.
Your job now is to pick stocks that have are undervalued and get in while the prices are depressed. In many situations, the fundamantal aspects of the company will be no different to what it was a month ago. The trick now is all about timing. The market is volatile and can move quickly in either direction so if you think you are picking the short term low - make sure you implement that all important stop-loss order.
The importance of hedging
Now i'm not talking hedge funds here. I'm simply talking about having a bet each way.
A simple risk management tool in volatile times is to have some short positions as well as long positions. For the CFD trader this is an easy thing to do... Here’s a basic example:
Say you want to trade four stocks. You would look for two stocks that you believe are undervalued and go long on them. You would then look for two stocks that you think are overvalued and go short on them.
In normal market conditions, assuming your assumptions were correct, you would make money on all four stocks. However, when the market takes a sudden downturn most stocks on the asx will go down. Your long positions will lose money, but your short positions will make money. If all goes to plan, the losses will be covered by the gains on the shorts leaving you in a similar financial position to the day before.
Also, when markets get nervous, the overvalued stocks (the ones you should be short on) will get hit the hardest meaning that you may even make money on a downturn.
The same occurs on an upside surprise. If the market booms, then your long positions will make good money, and this may be offset by some losses on your short positions. It’s a natural hedge.
The downside is that you might not be able to take full advantage of profiting from large market moves, but the upside is that you will be able to sleep easier at night. There is nothing worse than be heavily invested in the market (all long positions) and waking up in the morning hearing that there has been a heavy fall on Wall Street.
By trading a simple strategy like this should mean that you will continue to be profitable over the long haul without getting large financial shocks along the way. It’s also less stressful as you know you have some basic hedge protection. Of course, there are many other complicated ways of protecting your assets, but for the basic trader, this is a good place to start. It doesn’t matter how many stocks you trade, just make sure you have a reasonable balance.
How to find stocks to trade?
Most of you will have your favourite stocks that you trade or keep an eye on. Watch these intently for signs of renewed interest. We have a quite a few services that will help you find potential stocks.
1. The Smart Money charts
The charts show you the buyer interest in a stock based on information from the market depth queue. When the buyers start returning you can see this clearly on our charts. We also scan the market manually each day looking for stocks where we can see buyer interest increasing.
2. Daily Market Scans
Have a look for stocks that our daily scans find. You will find stocks that are 'technically' oversold as well as stocks that have just changed their trend. This can be a great place to get a short list of potential stocks to trade.
3. Directors Trades
Have a look in our Directors section. If you see Directors buying into a stock while it's falling, it can give you extra confidence that it is being unnecessarily oversold.
4. Broker consensus data
This section has loads of reports that help you find stocks that are becoming more or less popular by up to 23 analysts.
Good luck and trade carefully. We'll be with you all the way.
Regards,
Keith Nielsen
ASX Price at posting:
0.0¢ Sentiment: Buy Disclosure: Not Held
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