Louis’ Look (09-07-2020)
At University, I’m a part of a value investing club (don’t laugh), where twice a week, we get together to hear pitches from the members of what companies to add to the portfolio.
As much as I am an aspiring technician, it’s been a great experience to learn the other side of the coin.
In the last meeting, I asked what everyone thought the market would look like in the next few months. Being value investors, they couldn’t help but discuss the earnings beat in The a2 Milk Company and Fisher & Paykel Healthcare. For those unfamiliar with the New Zealand market, they represent a third of the domestic index, the NZX 50.
Despite how much I like my mates in the club and how attractive they had described the companies' financials, the stocks were already beginning to break down relative to the broader New Zealand market.
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And while the attention was on these two companies, it was interesting to see Summerset and Mainfreight, two other main holdings of the NZX 50, breakout of multi-year bases without a single mention in the club.
Click on the chart to enlarge view.
I’ve learned that, particularly in the NZX, where 90% of the market capitalization is only in 50 names, you miss out on what the market is trying to tell you if you over-complicate your process.
Market leaders are always changing.
As much as I understand the potential benefits of a fundamental approach to the market, it hasn’t come close to what I’ve learned through simply studying price. That earnings beat they were talking about before? It was already being discounted into the price of the stock months, if not years, ago.
On a similar note, I’ve recently begun helping out with the scans at the end of every week, where we receive data on the performance and price characteristics of all the charts under our watchlists.
As I poured over the data this week, I couldn’t help but notice this idea of this ‘leadership flux.’ In a week which saw the greatest selling pressure in months, 95% of S&P 500 Basic Materials names made new two week highs on a daily closing basis, and only 50% of Financials made new two week lows compared with 66% of Technology names.
What’s more, is that Banks ended the week positive while most other industry groups were down. That’s a change in tone from what we’ve climatized to over these last few months.
As basic as it seems, the biggest lesson for me in doing this exercise is the idea that leaders are always changing, and by studying price, we get a heads up before anyone else.
As I’ve mentioned repeatedly in this column, having a process of simplicity enables us to identify if and when these changes in leadership occur.
In saying that, if you have a crystal ball handy or just want to have a yarn about some of the neat stuff you learned this week, I encourage you to fire me an email at louis@allstarcharts.com.
Thanks for reading,
Louis