The markets have been difficult for traders who use trend following to identify trading opportunities, especially in the past few months as the Australian market has traded sideways.
Market Seasonality
Back in July we gave readers a road map for the markets, as our Education Manager Jeff Cartridge reviewed the seasonality of the market in an attempt provide a potential path for what to expect in the markets this quarter. This review was carried out using seasonal analysis of 26 years of ASX data as show below.
Based on the analysis of seasonality, Australian markets typically trade sideways from mid-August through to the end of September and the current market environment appears to be unfolding in the same typical manner.
If you have been struggling to identify specific stocks to trade in this market, then an alternate option is to approach the market with a top-down view using sectors.
What is Top-Down Trading?
Top-down trading was developed decades ago with the aim of considering as many key factors in your favour as possible before taking a position in the stock market. Top-down investors take a big picture view, looking first at the global economy to forecast which sector will generate the best returns.
This methodology is used to identify sectors that are trending, and then drill down into those sectors and identify stocks that are trading in the same direction.
The Market Analyser software has a very useful charting feature which allows you to step through your watchlist. In the case of sector analysis you can use the watchlist wizard to load the ASX GICS Sectors (“ASX GICS”), then step through each sector on your charts using the “Display the next Xcode in selected Watchlist” ( the blue circle button with arrow), as illustrated below.
Market Analyser - Charting Features
We have analysed the market by sector using the Market Analyser software and have produced the following table:
The top-down analysis results as tabulated, indicate the S&PASX 200 (.AXJO) is currently directionless with the short and medium term trends in neutral. The only sector(s) you would consider trading to the long side would be the Consumer Staples (.AXSJ) with the short and medium term trends rising, and maybe the Materials sector (.AXMJ) which has a medium term trend rising and short term trend in neutral.
Having identified the sector(s) to drill-down into, we can again use the Market Analyser software to obtain the stocks within the sector by selecting Menu > Quotes > Sector View. You can then select the stocks you are interested in and set up your own watchlist, as illustrated below.
Market Analyser Chart - Watchlist
Commentary
The Consumer Staples sector is obviously benefiting from the current focus on Agricultural businesses. News last week that Russia is suspending its wheat exports has pushed wheat prices to surge to 24-month highs and brings into focus our Agricultural businesses. Also news this week that BHP wants to take over Canada’s Potash Corp fertiliser business for $US39 billion is also adding to the focus.
The Trade
Trade stocks that are trading with the momentum of the underlying sector. Stocks with exposure to Agricultural business are outperforming in the current market. Foreign companies are eying off these businesses and this is adding fuel to the sector’s performance. There are a number of unresolved acquisition deals at the moment, such as AWB, CSR and Grain Corp. Other stocks to consider are AACo, Elders, Goodman Fielder and Ridley Corp. On a risk/reward basis, trade using a well-defined stop, perhaps just below the two-week lows, and before entering into any long position make sure that the stock price is trading above the previous week’s close.
By Michael Hevern
Head of Research
Sign up for a free trial of Market Analyser!
The information provided within this blog is general advice only and you should consult the services of a financial professional in order to ascertain whether the information is applicable to your investment strategies and risk profile.
