Trading Blue Chips for Profit — ASX 200 Trading Outlook
Seat belt on? Engine running? Good, we’re ready to go. We’re at the start of a massive week for the market. Prepare to put your foot down.
Why so? For three months the ASX 200 has traded in a tight range. Everybody is waiting for the signal to see which way the market is going to go.
There was one spooky wobble in late February. That was quickly bought back up. But then the market just went sideways again.
This is going to resolve itself soon one way or another.
If we see a break to the upside, I think it’s reasonable to assume the market could run quite hard.
There’s a lot of money waiting on the sidelines. And it’s not as if there are no opportunities out there — for capital growth or income.
I’ve been picking up some stock of Telstra Corp Ltd [ASX:TLS] in the last six months for my super fund.
The latest dividends hit my account last Friday. TLS also caught a strong bid that day too.
Currently, I’m up about 17% on the first parcel of TLS shares I bought back in September last year. That doesn’t include the dividends I just mentioned.
That’s not the kind of heart racing gain (or risk) you can get from the small-cap sector. But it was a very low-risk entry, in my book. It’s working so far.
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I began nibbling at Fortescue Metals Group Ltd [ASX:FMG] last week too.
It was down 28% off the January high as fears over the outlook for iron ore ratted the stock — not to mention their own goal around the new Iron Bridge mine.
But the stock is currently yielding around 15%. FMG rose nearly 4% on Friday. A few other traders might be thinking along the same lines as me.
Now, there are no gimmes in the market. Clearly the market is sceptical of the iron ore price. But right now, as in today, iron ore is still around US$160 a tonne.
There’s a further reason I feel more comfortable buying into Fortescue Metals right now. The market is pricing in a weaker iron ore price.
If that happens, the downside is less likely to be a savage sell-off because the market is already expecting it. I can always cut off the position if need be.
But if iron ore holds steady, or goes up? FMG could charge up to attack its former high.
I’m not saying you should buy Telstra or Fortescue, by the way. I’m in both now — but I might be out tomorrow.
But it does highlight an important point. There are short-term opportunities appearing in familiar blue chips constantly.
These are the situations my colleague Greg Canavan is going to exploit as part of his Life at Zero investing campaign.
Leaving your money in cash can be a ticket to nowhere — unless your husbanding it until the next opportunity comes along.
When Telstra fell back under $3 last year, it was a very low-risk position to take.
How do I know?
Because Greg had crunched the numbers of the stock and saw that its free cash flow was huge.
Free cash flow is the truth serum in the stock market.
Now the stock is catching a bid as the market sees the value creation from the restructuring of the assets and the incoming tailwind of 5G.
Greg’s focus will be on the Top 200 ASX stocks. These offer lots of liquidity and market size for you to position comfortably.
Their balance sheets are usually complicated and need to be scrutinised by a professional analyst to make sure there are no gremlins looking in there.
You also need years of market experience to see when there’s a genuine opportunity to exploit a mispricing, or a steady hand when things get volatile.
Greg is the most stoic soul you’ll come across. I don’t think I’ve ever seen him rattled.
I made the mistake of not listening to him on the opportunity to buy the banks last year — too damn sceptical for my own good — and cost myself nearly 40% gains on the sector.
I’ll listen more carefully next time!
But if you’re looking for income and capital growth on the ASX 200 right now, make sure you check out Greg’s Life at Zero presentation here.
I’m using a similar strategy for part of my super fund, and it’s working well so far, even in this sideways market.
And if things heat up? My — that could be very profitable indeed.
Editor, The Daily Reckoning Australia
PS: Of course, our editors do not normally trade in stocks which we recommend, however, we can invest alongside you for the ASX top 200 companies, which are so large, their prices would not be impacted.