Averages show where you stand
Technical aids can reduce confusion
“THE ONE SAYS so and so, while the other says precisely the opposite. Both sound convincing, I’m worried about what to do with my shares. Must I sell or hang on to them?”
That’s the voice of a confused investor, which we hear regularly these days. Investors are told the JSE has risen too quickly and no longer offers value; a substantial correction can therefore be expected. That’s not only here but internationally, because Wall Street, the world leader, is also regarded as too high. Then the problems of the Eurozone – especially, as caused by Greece – are also a worry.
There’s a view that nobody can manage your money as well as you can yourself – which actually means you must be in control of your investments at all times. Therefore, let’s take a look at some of the basic technical aids that can help you decide where you stand with the market or a specific share.
Market players use a wide variety of technical systems to try to “read” the messages coming from the market. In other words, the person tries to build up an image of where an investment is standing and where it’s heading – which is actually just risk assessment. One of the most popular and simplest techniques used is the moving price average. It’s now easy to get hold of those statistics. Several brokers, such as Sanlam’s iTrade or PSG-Online, provide them free to their clients. You no longer have to buy an expensive program. The big advantage of price averages – especially over the longer term – is that they eliminate the confusing daily market “noise”.
Look at the graph of the JSE’s Alsi. Can there be any doubt about the message conveyed by its long-term average? The 40-week (or 200-day) averages are used to show the direction of the market’s main trend. Though the 40-week average isn’t very sensitive, it’s used worldwide as a yardstick to show where the market stands in general terms. And when there’s a correction there’s a tendency for the share price and its short-term average – I like the five-week (25-day) – to turn around somewhere in the region of the medium-term average, say the 13-week (65-day) average, or the long-term average. All that happens is that buyers positive about the prospects of the market or share tend to appear at those levels, which stops the decline and turns the price around.
So if you’re going to use the long-term average to show where you stand you’ll have to go up or down with it all the way without paying too much attention to the market’s daily noise. When it goes up that merely shows the bulls are in control and a rising market is being experienced. When it’s the other way around it’s a falling market and the bears dominate.
Which average should be used? Inter- nationally, the 200-day average is the most popular. However, in the case of shares of a strongly cyclical nature – such as mining – I prefer the 150-day (30-week) average. Since shares differ so much from one another the ideal is actually to determine its own average for every share individually by going far enough back. For example, mining and retail shares will have deeper cycles than bank shares or diversified industrial shares, such as Bidvest.
To protect yourself in the current uncertain climate you should check on the long-term average at least once a week. If it starts turning over – in effect, becomes tired – you’re entering a selling dimension. That will at least protect you from large losses, such as the 76% by which Anglo American fell between June 2008 and March 2009. You could have climbed out at R338, while it fell to R134. With Old Mutual, which fell by 83% mainly on account of its weak US investments, you’d have seen the writing on the wall at around R25 when the 40-week average turned around. You could have secured your approximately 100% profit, after the average originally started moving upward at just under R12.
All this can be refined by studying the relationship between the short, medium and long term averages and also by plotting other aids, such as trendlines, which will be discussed in future articles.