Commodity stocks can generate big profits
…the secret is patience until the shake-out is over
Abear market will eventually run its course and attempts made by the authorities to prevent this will at best only temporarily relieve the pain for investors. This is apparent from a study by an international market analyst, Harry D Schultz, of a period that covers a century. He uncovered certain “truths” that he believes will always apply.
One of them is that a bull market reaches its true end in the midst of wild speculation during which novices “play” the market, often with borrowed money. They do indeed make quick profits without having any idea of the underlying value of the companies concerned.
This has been called a fools’ market – a new fool buys from an existing fool, while the price keeps on rising, until the last fool has bought. Then the market implodes until the shares concerned again offer good value, which attracts the well-informed investor.
In the West, including on the JSE, wild speculation has not been evident.
A drop of about 1 000 points in the Dow Jones Industrial Index has, however, attracted everyone’s attention.
From articles that have appeared since the Chinese share market took a major dive after a period of wild speculation, it would appear that no one is expecting the bull market to resume, no matter what steps the authorities take. According to Shanghai’s Composite Index, the market dropped by about 47% before the authorities’ actions helped it to recover by some 10%.
Is the market, which is being watched by the whole world because the Chinese giant plays such an important economic role, going to follow the path that Schultz claimed was inevitable? What is different in China’s case compared to the West, is the tough measures taken by the Chinese government.
Large investors have been forbidden to sell their shares for a period of six months.
An enormous amount of money (the so- called bazooka) has been made available for loans to people who want to buy shares.
Traders who have been trying to sell shares short as they are expecting a further drop, which means they can buy i n at a l ower price, have been threatened with arrest. Schultz found that bear markets are essential so that values can recover. Short sales accelerate this shake-out process, after which calm seems to descend before a new bull market carefully recommences. How can this happen if the above-mentioned measures are in place? Or is it simply going to lead to an extended bear market amid great volatility? The London Stock Exchange is on the cusp of a bear market, measured in terms of its FT100 Index, because commodity companies play an important role in its composition. The index has weakened by about 19%, while 20% is regarded as a bear market. At the same time, the FT100’s 200-day exponential moving average has turned downwards. As the shake-out process often releases great value, exceptional profits can be made by those who have the courage to buy amid doom and gloom. And exceptional value is currently increasingly being offered by commodity shares.
On t he JSE, l a r ge commodity groups are experiencing a severe bear market with companies like Assore and Kumba tumbling by between 80% and 90% from their historic highs. Lonmin shows a loss of close to 99%, although the group has valuable assets as the world’s third-largest platinum producer.
The secret of making money from a turnaround in a bear market is to be patient. Only buy quality shares that form sound bottom formations in their graphs such as an inverted head and shoulders, double bottoms and saucer formations.