Com­mod­ity stocks can gen­er­ate big prof­its

…the se­cret is pa­tience un­til the shake-out is over

Finweek English Edition - - MONEY -

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.

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