The relationship between the trio must now be watched carefully
A warning light
AS IT HAS DONE over the years, the market again sent shudders through one and all when the Alsi fell through its longterm average (200 days or 40 weeks) for the first time since May last year. However, if you use the three moving averages we’ve discussed so far in this series, you won’t let that frighten you unduly – although the extent of the fall does constitute a warning light.
Watch the relationship between the three carefully from now on. As long as the medium-term average – say 65 days or 13 weeks - remains above the long term, you aren’t forced to do anything. Don’t buy or sell: that means the market, as well as individual shares.
It’s important to remember that investing in shares is shrouded in uncertainty. You’re working with perceptions and expectations. However, it’s true companies that consistently increase their profits – and preferably their dividends – can reward you handsomely over the long term.
Sound common sense is a valuable asset in this regard and it’s always useful to read at least the two latest annual reports of a company before you invest in it. For example, Sappi has been struggling for a number of years because the paper industry is so problematic, including advances in computer technology that eliminate so much paper. A couple of obvious examples are emails and SMSs. Then the industry has also struggled with surplus production capacity. Compare that with other resources shares, such as platinum – where shortages are being forecast – and Kumba’s iron ore, for which there’s so much demand in China.
Always try to relate a company’s potential to show profit growth to the relationship between the three moving averages. Let’s look at a few “rules” that could help.