The re­la­tion­ship be­tween the trio must now be watched care­fully

A warn­ing light

Finweek English Edition - - Moneyclinic -

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.

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