blind followers beware

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    Hmmm... BRW Daily.

    Blind followers beware.
    By Colin Nicholson
    Wednesday, February 19, 2003

    The consensus view of investors seems to be that stockmarkets will keep falling until war with Iraq is confirmed, and rally sharply once it is clear that the United States (or the United Nations) force is winning easily. Some commentators are suggesting that stockmarkets could rise by 10-20%. They might be right, but following the herd is generally a dangerous investment strategy.

    Smart investors know that the main game in a bear market is not to make windfall profits, but to protect capital in order to have funds to invest when the market enters a bull phase. Following the consensus view is often a shortcut to destroying your capital.

    It should be remembered that many investors are basing their views on what markets did during the Gulf War, and drawing simple conclusions. In 1991, investors sold on the declaration of war and missed the stockmarket rally after the successful attack started. No doubt they are wary of making the same mistake twice. Therefore, it is likely that many investors will hold on to their stocks now in anticipation of a rally, or rush to buy stocks once the crisis abates, in the hope that they will move sharply higher.

    Long experience in the market suggests that if everybody thinks something is going to happen, it rarely does. The rally might be more muted than expected, or may not happen. Markets could rally briefly, yet not disturb the pattern of the underlying bear market. The likelihood is that the rally, if it does occur, will be a good opportunity to sell stocks at higher prices, before they start to fall again. This makes it all the more important to watch the charts, to see which way the weight of money is moving.

    The daily line chart of the Australian Stock Exchange's All Ordinaries index shows considerable weakness compared with all but the London market in the past week or two. It has plunged through the higher support level and is poised to fall through the lower one at the October lows. The critical level is 2840 points. If the index falls through that, the possibility that the bottom of the bear market has been seen will have receded in favor of the likelihood of another downward leg of the bear market unfolding.



    The right trend
    Cash Converters International (CCV), the secondhand store franchisor and money lender, seems to have pulled out of a spectacular dive from its listing price at 60¢ in February 1997 to 2¢ in June 2001. The daily line chart of its share price shows that CCV has since risen off the extreme lows and has begun an upward trend. The first move was a 150% rise off its low point. After a prolonged sideways holding pattern, CCV has risen strongly to 8¢. It is now well above the resistance level at the top of the 2002 consolidation period. The long-term trend indicator, the 260-day moving average, has also turned upward. This thrust, assisted by a stock buy-back, suggests the market expects CCV to announce some improved results. Market lore, where traders buy on rumor and sell on fact, suggests that CCV will then partly give back some of its gains, say to about 5¢. That may provide an entry point for aggressive investors or traders in this speculative situation. However, if CCV fell below the 2002 sideways pattern, say to 3.6¢, the pattern will have gone pear-shaped, and the stock should be sold.

    img src="http://www.brw.com.au/images/20030213/080_gNic2.gif">

    On your marks
    After listing in November 2000, the trans-Tasman general merchandise retailer Warehouse Group (WHS) immediately rewarded investors. Its shares rose from $4.20 to $5 in 2001 to a peak of $6.80 in mid-2001.

    WHS then traded for the rest of 2001 in a range between $6 and $6.80. This was comfortably above the long-term trend indicator (the 260-day moving average), and seemed to be an inevitable consolidation period after the rapid mark-up in its share price. Indeed, WHS reached record highs in mid-January this year.

    img src="http://www.brw.com.au/images/20030213/080_gNic3.gif">

    However, buyers at that peak got it awfully wrong. The company's second-quarter sales and earnings guidance led to an immediate and continuing slaughter of its share price, which closed last week at $5.48. This has violated the support level at the bottom of the consolidation range and the moving average. The support level marks the level above which there are many losing investors who will be likely to sell into any rally.

    In these situations, investors should run, not walk, for the exit. The first bad news in these situations is usually not the last. Capital is better employed in stocks with more positive outlooks.

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    This is only my view ... read the red stuff.

 
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