When the Unexpected Happens…

Monday, 3 February 2020
Adelaide, Australia
By Bernd Struben

  • Dodge left…no right
  • Why We Sold Last Week

Yesterday I was reminded just how fickle life can be. The goalposts can shift at any time. Especially when money is at stake.

The reminder came during a day out with the family to the Strathalbyn racecourse. It’s an impressive setup for a small town. With a full day of races and, of course, the obligatory gambling.

We only bet on one of the races. My daughter chose a 60:1 horse because she liked its name. My wife picked her horse based on how it measured up with the others in the mounting yard. And I went with the horse whose jockey had the best win rate. If he managed another win, my bet would pay off 4:1.

My wife placed all our bets — we’d never let our six-year-old daughter gamble her own pocket money…or pocket all the winnings — then we took our seats.

Right before the gates were meant to open, one of the horses — the favourite — suffered a minor injury.

The race went on with less than a minute’s delay…minus the favourite. And my horse won by half a length.

With a 4:1 payoff, I would have covered our other two losses, plus the entry fee, lunch and petrol. My kind of Sunday!

But like I said, life is fickle. And with the last moment elimination of the favourite horse, the odds changed. And the payoff for the winning horse dropped to 3:1. Still nice, though not what I’d thought I was signing up for.

It’s an important reminder because when it comes to the investment world, the goal posts can shift just as quickly. And even more dramatically.

More after the markets, where gold and bitcoin are among the few winners. Though futures markets are pointing to a modest gains tomorrow for most US and European markets.

We’ll see…

Markets

Over the weekend, the Dow Jones Industrial Average closed down 603.41 points, or 2.09%.

The S&P 500 closed down 58.14 points, or 1.77%.

In Europe the Euro Stoxx 50 index closed down 49.87 points, or 1.35%. Meanwhile, the FTSE 100 lost 1.30%, and Germany’s DAX closed down 175.15 points, or 1.33%.

In Asian markets Japan’s Nikkei 225 is down 223.19 points, or 0.96%.

China’s CSI 300 opened for the first time today since closing on 23 January for the Lunar New Year holidays. Despite a 1.2 trillion yuan ($256 billion) cash injection from China’s central bank into the financial markets, today’s selling is fast and furious. At time of writing the index is down 8.30%.

The S&P/ASX 200 is down 80.00 points, or 1.14%.

West Texas Intermediate crude oil is US$50.84 per barrel. Brent crude is US$55.70 per barrel.

Turning to gold, the yellow metal is trading for US$1,588.60 (AU$2,374.23) per troy ounce. Silver is US$18.07 (AU$27.01) per troy ounce.

One bitcoin is worth US$9.395.88.

The Aussie dollar is worth 66.91 US cents.

Dodge left…no right

Getting back to the ever changing equity markets…

Diligent research can help minimise many risks. But no amount of study can ensure there won’t be issues like unexpected capital raisings. If a company you’ve invested in needs more cash it can either take on more debt or issue more shares. Either way, the share price often suffers in the short term.

And if you’ve invested in the big banks — as most every superfund has — you’ll be well aware of how the royal banking commission shifted the goal posts in the financial sector.

[Ed note: For Ryan Dinse’s top small-cap picks to potentially gain from the big banks’ pain go here.]

More recently we’ve had the devastating bushfires. Atop of tragic losses of life and homes, the fires have knocked the stuffing out of some stocks.

SeaLink Travel Group Ltd [ASX:SLK], among other things, runs daily ferries to Kangaroo Island. With the mid-term tourism outlook dampened, its share price is down 12.5% in 2020.

Kangaroo Island Plantation Timbers Ltd [ASX:KPT], almost certainly, has fared even worse. I qualify this statement as KPT has been under a voluntary trading suspension since 3 January while it assesses damage to its plantations.

I met their CEO, Jeff Ellison at the Exchange SA conference in October. Asked about the hazards of fire at that time, he said the company has insurance and has spread its plantations across the island with some fire breaks between. I hope that proves sufficient. But I fear shareholders may be in for a nasty shock once trading resumes.

The latest shift in the goalposts, impacting stocks across the globe, comes from the unknowns presented by the coronavirus.

Last Monday, 27 June, US markets were battered by investors running scared. Then markets shrugged off the fears from Tuesday through Thursday, only to sell-off heavily again on Friday.

And as you saw in the markets section above, the ASX and Asian stocks are following that lead sharply lower today.

Aussie education and travel stocks — heavily exposed to Chinese demand — are among the hardest hit.

Qantas Airways Ltd [ASX:QAN], for example, is down 12.3% this year.

But if Chinese ports are off limits, even temporarily, that pain will spread to the big miners and other export oriented stocks as well.

What to do?

Stay informed and stay nimble. No one could have predicted the lethal new coronavirus following so closely on the horror bushfire season. And no one can accurately predict how this will all play out.

In the short-term, health stocks are likely to outperform. But if a vaccine comes to light or the virus is brought under control, overhyped health stocks could tank while the battered travel and leisure stocks come roaring back.

As I said up top, life…and the investing world…are fickle.

Video update…black swan survival guide

Below veteran stock trader Murray Dawes share’s this week’s trading tips and insights.

You heard from Murray in Port Phillip Insider on Friday. You can find that in your inbox or on our website, here, if you missed that or want a quick review. (You’ll need your password to access the website.)

Today, Murray looks at some of the technical reasons for taking profits just before the big sell-off.

Scroll down and click on the image below to watch Murray’s latest video now.

You can learn more about the edge Murray offers active traders over at Alpha Wave Trader by clicking here.

Cheers,
Bernd


Why We Sold Last Week

 

[Murray took profits last week prior to the big sell-off. Click on the picture to watch a video that explains exactly why he did it.]

I wrote an article for you last Friday outlining my reasoning for taking some profits off the table in my Alpha Wave Trader service. We took profits in five stocks on Thursday morning.

You can find the article here.

I didn’t give you a detailed analysis of my technical reasoning for taking profits in that article. So I have put together a video for you today showing you what I was seeing in the S&P/ASX 200 futures charts.

Price action can appear random but there are underlying dynamics that keep happening again and again.

One of the major things that keeps happening is short-term traders getting shaken out of their positions.

When you understand how traders are continually shaken out you can start taking advantage of the fact and plan trades accordingly.

I have described to you on many occasions how ranges develop. There is an oscillation that develops around an initial range. Prices attempt to break away from the range on many occasions but often get sucked back into the range and revisit the midpoint or point of control of the range.

It is this process that continually fools amateur traders.

They buy near the high of the range or go short near the bottom of the range and get shaken out.

One of the key characteristics of range development is that there is a relationship between the size of the false break of the range and the width of the initial range.

If that sounds confusing, all you need to do is click on the picture above to watch the short video where it will be described to you using my charts. It will make sense to you in a jiffy.

I show you the last few years of trading in the S&P/ASX 200 futures contract and point out the numerous occasions where prices changed direction in relation to a previous range.

Whether a market is trending or rangebound the same levels keep showing up as the key points where you should look for a reversal.

I used those levels last week when I decided to take profits only days before the biggest sell-off in months. And I wrote an article to you on Friday warning you, BEFORE the selling began.

If you’d like to learn how I did it, just watch the video above.

Regards,

Murray Dawes,
Editor, Alpha Wave Trader