The Award for the Best Performing Commodity Goes to…

Iron ore mining

After a strong day yesterday, the Aussie market looks like giving back some gains today. But given US markets were closed overnight and European stocks were only slightly weaker, I can’t see the selling getting too out of hand.

Unless you own aged care stocks!

Yesterday saw the sector take a battering. Regis Healthcare [ASX:REG] plunged nearly 17%, Estia Health [ASX:EHE] fell almost 12%, while Japara Health [ASX:JHC] lost nearly 15%.

The cause? A change to government regulations over what aged care providers can charge people staying in their facilities.

But you needn’t be caught out by announcements like this. 90% of the time, the market will give you clues that you should be out of a stock, BEFORE the really bad news hits.

In this case, all three stocks had similar chart patterns. Let’s look at JHC as an example. The chart below shows the stock’s performance over the past few years.

In the early days, JHC did nicely. As you can see, the moving averages (the red and blue lines — a proxy for the share price trend) moved steadily higher throughout 2015.

After peaking in November last year, JHC corrected lower and started to move sideways. The upward trend was running out of steam. The first warning sign occurred in April this year. The stock price corrected sharply below the moving averages. The attempt at a rebound found resistance at the moving averages and then began grinding lower. Worrying signs…

Source: Optuma
[Click to enlarge]

If you were prepared to hang in there, the next, more definitive sign came in early June when the stock broke down sharply to new lows. That’s not a warning sign, that’s a siren going off telling you to get out NOW!

A stock breaking down to new lows that confirms a downtrend is in play is a stock that you don’t want to own. And if you do own it, you should get out.

The problem is, people don’t like taking losses. They think they should hold on and hope for a rebound. Then, when the rebound comes, they think the stock is going higher…until…wham!

The stock crashes and it goes into the ‘bottom draw’ — the last destination of the hold and hope portfolio.

If you want to avoid these types of wipe-outs, learn to look at a chart when reviewing your portfolio. Looking at a chart dispassionately will encourage you to interpret the fundamentals in a different light.

That is, instead of thinking, ‘this stock is a good one because I own it’, you’ll look at a chart and say: ‘Something is going on here that doesn’t look right. Maybe I need to get out and reassess my position.’

What do the charts say about the market in general? Let’s have a look at the ASX 200. The chart below shows the performance of the benchmark index over the past 18 months.

The market bottomed in February this year. From that spike lower, it rebounded sharply and has made a series of higher highs. You can see that the moving averages turned up in May, too. This indicates that the market is in an upward trend.

Source: Optuma
[Click to enlarge]

The recent correction is nothing out of the ordinary. In fact, so far, it’s shallower than the corrections that took place earlier in the year.

From a fundamental perspective, it’s hard to see the market pushing higher from here. The earnings season was average. Apart from lower interest rates, there’s no obvious tailwind to push the market higher.

In saying that, nothing obvious ever happens in the market. More precisely, I mean nothing obvious happens that you can make money from. There are no free lunches; and trying to understand the reasons behind the markets’ moves is a futile occupation.

It reminds me of something legendary trader Ed Seykota said. ‘Some people would rather understand the market than make money.

In other words, you don’t always have to understand the market to profit from it. You just have to go with the flow. If the flow is bullish, don’t fight it; hop on board instead…even if you don’t understand it!

That’s how it feels now. The chart of the ASX 200 looks positive, yet I can’t see too many fundamental reasons to be bullish. Perhaps the only one I can come up with is that inflationary forces are stirring in the global economy, and that this is going to have a positive impact on commodity prices.

The award for the most outstanding commodity performance of 2016 probably goes to iron ore (I’m not sure, I haven’t done the numbers). As a result, leveraged iron ore player Fortescue Metals [ASX:FMG] has enjoyed a 240% share price surge since the start of the year.

However, I can’t bring myself to ‘go with the flow’ here. Iron ore responded to China’s stimulus at the start of the year. The demand spurt is not sustainable. Supply is still very strong. I’m tipping a price fall by the end of the year.

Gold has also had a good year, although the sector is now taking a well-earned breather. I am going with the flow here, and believe that now represents a good time to accumulate gold stocks with quality projects, or, if you’re into higher risk options, companies with good exploration projects and enough cash for a decent drilling program.

Speaking of which, my friend Kerry Stevenson runs the Gold Symposium every year in Sydney. The event takes place over two days (10–11 October) and is chock full of all things gold. I’ve attended for the past two years and one of the things I like about it is hearing from companies at the smaller end of the gold space. You just don’t get these stories in the mainstream media.

I asked Kerry if she could do something for my readers. She has offered to take $100 off the ticket price if you book by 19 September. That’s only $199 for the two-day event.

Click here for details. Enter portphillip in the promotional code area when buying to secure your discount.

Keep in mind that this is not a Port Phillip Publishing event. I just thought I’d pass it on because it’s a good deal and I know Kerry always puts on a great event. So check it out if you want different ideas about investing in the precious metals space.

That’s it from me…I’ll be back on Thursday!


Greg Canavan,
For The Daily Reckoning

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

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