A quick sharemarket update

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Speculating in "trends" is no different to gambling

Speculating in "trends" is no different to gambling

A quick look at the Australian sharemarket reveals a few interesting trends of late. Here is my take on some of the ‘flavour of the month’ trends.

Remember the Great Disclaimer – Nothing in this post or on this site is to be considered personal advice. It is information and observations of a general nature and you MUST NOT use it as a basis for making financial decisions. And all the other disclaimer stuff, which you can read more on here.

You may have noticed the rapid rise in price for companies that are involved in drilling or digging up the stuff much lovely by commodity traders at the moment – iron ore, coal, copper, oil, rare earths, gold and even aluminium.

It seems as if some of that rush has begun to die down. Here is a small selection of companies that have benefitted massively in the recent past from that speculative interest, and a look at how their shareprices have subsequently risen. Now however, we can begin to see some of the steam come out of those prices…

Chart for Artemis Resource shares

Massive rises followed by equally massive falls

Chart for Sandfire Resources

Positive exploration results boost the shares but the falls are still substantial

Thundelarra Exploration shareprice movements

If your timing is lucky...

Cape Lambert share chart

Once that trend is broken, all bets are off - in the short term, at least

PAN share chart

The size of falls in these areas can be amazing

Of course these individual companies would have individual positions – they may be in the midst of massive production growth or reductions, capital raisings, announcements for capital restructures etc, etc, etc. There may be quite valid reasons for every individual movement in price – but the end result is that companies such as these are in for forefront of the current trend for resources and therefore a big chunk of their short term movement will be reflective of the speculation on the long term value of their assets and activities.

Some people have made large amounts of money buying into these companies before the price rises, and banking the profits when they sell at a much higher price. However, many people don’t actually buy such shares until the price has already risen a lot – and this increases the chance that a premium is being paid. Some of these price rises have been well over 100% in only a few months. This is what would be considered super-normal profit, and should be a blinking light to the possibility that it is time to reconsider the holding, and its original purpose.

Of course, if the “stronger for longer” theme holds true, and if China and India continue to need ever increasing amounts of commodities for growth then dips in price might be good buying opportunities… but that is the trick, isn’t it? To work out when an opportunity is something you should grab hold of and when is it just a short term speculative risk that you should not be taking?

In financial circles, discussion rages over the price increases caused by simple demand versus those caused by increased speculation in future trends. There is a line of thought that suggests the current printing of money in the United States is causing a flood of money into speculative enterprises around the globe – with Australia being a major beneficiary of that in one way or another. The Federal Reserve in the USA is set to stop the current $600bn round of printing money (“Quantitative Easing”), and if so then the flow of funds to speculation in commodities and “emerging markets” is likely to dry up. That same line of thinking suggests that this reduction in cash will result in a rise in the volatility of commodity markets, which is likely to be reflected in the share price of companies operating in the area.

In other words, the trend can swing either way, and quickly. All very fascinating stuff, isn’t it?

In news just to hand, it seems that the Japanese earthquake is moving on to a financial impact here in Australia. The sharemarket starting falling early today and this is quite possibly in response to the 9% or so fall in the Japanese prices (relative).

It is worth keeping in mind that any such changes are very likely short term from a financial impact. That is, there will need to be a huge investment into infrastructure (including replacing ruined nuclear reactors) and this is likely to cause even higher demand in the medium term.

Most people will find it very hard to make rational decisions in an environment like this. Have a look at the recent newsletters or websites promoting financial advice, and you’ll see just how varied the advice from professionals is at the moment.

So, the old saying “the trend is your friend” can still be helpful but

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