Every action has an equal and opposite reaction

December 8th, 2008  by Antony Ganzitti

Closing Data

	current	change	%
Dow Jones	8635.42	259.18	3.1%
NASDAQ	1509.31	63.75	4.4%
S P 500	876.07	30.85	3.6%
FTSE 100	4049.37	-114.24	-2.7%
Nikkei 225	7917.51	-6.73	-0.1%
SPI Futures	3599	76	2.2%
All Ords	3,468.00	-8.4	-0.2%
Oil	41.01	-2.79	-6.4%
Gold	752.2	-13.3	-1.7%
Silver	9.43	-0.09	-0.9%
Aluminium	1446	-98	-6.3%
Copper	3050.5	-310	-9.2%
Lead	915	-85	-8.5%
Nickel	9080	25	0.3%
Tin	11585	-120	-1.0%
Zinc	1096.5	-38.5	-3.4%

The Dow Jones index jumped 3%, SP500 3.6%, and the NASDAQ 4.4%; all on the back of the worst US non-farm payrolls number in 34 years!  What is wrong with this picture??

Market indices all bucked their recent trends on Friday evening, even with 533,000 job cuts in November in the US (193,000 more than expected) and marking the worst number recorded since 1972.  It was a case of ‘sell the rumour, buy the fact’, as bargain hunters drove prices higher after a subdued start to the session.  One may ask how this is possible with all the bad news in the current climate?  Simple.  The bad news had already been factored in to current prices.

It’s important to keep note of the big picture.  The Australian market is trading at 3489, 272 points off its low of two weeks ago, and 3362 points from its record high (a fall of 49%).  Even if we do not start moving higher immediately, the market is exhausted, it needs a break, selling pressure has slowly subdued, and bottom line, many retail traders and investors have left the market, shell-shocked!  A famous phrase, ‘every action has an equal and opposite reaction’ can be related to this scenario.  The market has found a new equilibrium and will slowly rebalance itself and with all the bad news, exhausted sellers, and deleveraged margin accounts, the natural progression has to be to the upside.

Friday gave a perfect example of why we need to be stringent when examining oversold stocks.  Felix Resources (FLX) was a onetime market darling involved in the coal sector. However with the recent fall in commodity prices and the lack of demand for resource companies, FLX plunged from a high of $23.28 to a low only last Tuesday of $4.81.  On Friday the company confirmed Yanzhou Coal was interested in a potential takeover and the shares shot to a high of $10.48. 

This type of situation will be common going forward in the current market environment.  Smart money managers and investors focus on downtrodden assets when demand is limited and prices are subdued.  Typical ‘Warren Buffet style’ investing.  The trick now is to critically examine other opportunities in not only the merger and acquisition scene, but also the oversold category.

Resource stocks seem the likely candidates for such activity, however down and out industrials and those in monopoly-like industries may also prove profitable. 

Suncorp Metway (SUN) has slowly lost its shine, but at current levels offers value. Brambles (BXB) offers exposure to a unique product offering. Woodside Petroleum (WPL) has previously been looked at as a takeover by 34% shareholder Royal Dutch Shell. Crown (CWN) has unique assets which may prove to be profitable through tough economic times.

This is just a small handful, but best of all, they are all blue-chip and all included in the ASX50 index, and suitable for all types of investors.

Technicals…… can we get a Christmas rally?  All focus is on weekly price bar action at present.  In the previous 4 weeks we have had Monday to Friday moves, so if the index started the week positively it would end on that note and vice versa.  Today will be important to see if we can maintain this trend.  A break of today’s lows will see the bearish trend continue, and therefore is able to be used as an adequate risk management area for stop losses on any new long positions.  See weekly ASX200/XJO chart below, note also last week was an inside bar, otherwise known as an ‘indecision’ bar, and particularly useful in determining potential trend reversals.

 

The daily chart below needs to clear 3622 early this week for technicians to build a case for a potential rally into the end of the year.  Keep an eye on this number.  If expected moves don’t eventuate, be prepared for a month or so of mindless sideways action as volatility slowly dries up.

 

Late news: Santos (STO) is up 12% with large volume on rumours of a potential takeover.

Contact your Freeman Fox Stockbroker on 07 3031 9960 or 1800 003 369 Ext 7.

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