Av­er­ages show where you stand

Tech­ni­cal aids can re­duce con­fu­sion

Finweek English Edition - - Money Clinic - LU­CAS DE LANGE

“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.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.