Category Archives: Technical Analysis

Remgro/RMB Unbundling


South Africa is the land of monopolies. Historically, under the National Party, South Africa was cut off from the rest of the world and isolated from international competition. This led to the development of massive local monopolies such as that of SA Breweries and Anglo American (which at one stage controlled more than 50% of the blue chip companies on the JSE). Many of those monopolies consisted of enormous conglomerates of companies tied into structures which usually left them trading at considerably lower prices than the value of the share which they owned.

In the new South Africa, there has been a trend towards breaking up those structures and releasing shareholder value. One of the most recent examples has been Naspers which first unbundled Multichoice into the hands of its shareholders and then restructured with the formation and listing of Prosus on the Euronext in Amsterdam.

It is a well-known fact that investment holding companies traditionally trade at a discount to the value of their underlying assets. This discount can be anything from 10% to 40% depending on the company. One of the ways to “unlock” this value is for the holding company to unbundle the shares of a subsidiary or a large holding into the hands of its own shareholders.

Thus, if company “A” owns a 40% interest in company “B” it can distribute that holding of company “B” shares to its own shareholders and then it steps out of the picture and the structure is simplified. This often has the effect of increasing the prices of both companies’ shares on the JSE. Read More

Altron


On 31 October 2017, we published our usual monthly Confidential Report and in it we drew your attention to Altron. What we said was:

“For the two years between 2014 and 2016, Altron did badly, but since then the share has executed a long slow “saucer bottom” and now appears to be mounting something of a comeback. The newly appointed CEO, Mteto Nyati, is at the front of this new optimism.

Consider the chart:

Altron (AEL) August to October 2017 – Chart by ShareFriend Pro

Read More

Volatility


During a strong bull trend 80% of investors are bullish and 20% are bearish – which is why the market rises quickly. The opposite is true of a bear trend. But during both bear and bull trends there is far less uncertainty among investors as to what will happen next. Uncertainty usually expresses itself in sideways markets. During a sideways market (sometimes called a period of “consolidation”) opinion about the future direction of the market is evenly balanced between bulls and bears.

From a technical perspective, the further that a chart departs from its average, the more volatile it becomes and the less certain the future becomes. The most predictable chart is a straight line – the further a chart departs from that, the less predictable it becomes. At the same time, the more volatile a share becomes, the more opportunity there is for capital gain. So, we can reduce this discussion to three words:

Volatility = Unpredictability = Risk

And risk is not necessarily a bad thing because it brings with it the opportunity for profit.

For the private investor it is important to be able to gauge the level of volatility in the market. One of the best ways to do this is by using Bollinger Bands. Read More

The Confidential Report – October 2019


United States

The Federal Reserve Bank of America (Fed) has cut rates again by a further 0,25% which indicates that the monetary policy committee (MPC) is still concerned about the possibility of the US economy sliding into recession.  At the same time Europe has resumed its quantitative easing program also because of fears of a recession. Some of this is certainly due to the trade war between America and China. Nobody is quite sure how that will play out in the world economy and the primary result has been a shift towards “risk-off”. This risk-off sentiment has had an impact on the S&P500 index and also on the South African rand. Consider the chart of the S&P500 since April 2019:

S&P500 Index April to October 2019 – Chart by ShareFriend Pro (Click to Enlarge Image)

This shows the previous cycle low at 2744 made on 3rd June followed by the rise to the all-time record high at 3025 on 26th July. After that, Trump managed to invoke the next correction with his China trade war taking the S&P down to support at around 2840. A period of sideways movement followed, generating a “flag formation” which we predicted on 4th September would break to the upside. That upside break has occurred, but a new record has not yet been set. The index is currently falling back towards the resistance line of the flag formation – which is at around 2932. That resistance has now become a support level.

In our view, we expect that the index will move upwards from current levels and break above the all-time record high – probably sometime in the next month. That will signal a resumption of the great bull market which has been in progress for over ten years since March 2009. Read More

Spur


The decision to buy into a share is often scary. What if the share falls after you have bought if? You may then have to execute your stop-loss and lose money. There is a tangible feeling of risk.

Obviously, you want to buy a share when it is at a low point in its cycle – after it has fallen so that you can get it cheaply. But when a share falls there is always a reason – and you might be concerned that it could fall further. There is usually considerable negative press which accompanies a falling share and you will definitely feel the risk of investing. In fact, if you don’t feel the risk you are probably not going to make any money.

Of course, the ideal place to buy a share is somewhere close to its cycle bottom – and that means that you must “see a mountain behind you”. In other words, the share should preferably have fallen from a much higher price.

At the same time, it is far better if the share is an established blue chip with a solid business and a long track-record of being profitable. That way you can be fairly certain that it is not going to fail completely and that sooner or later institutional fund managers will begin buying it again.

One of the ways to mitigate the risk is to at least wait until the share has turned and is moving up again. Ideally, you want to buy it when it is past its lowest point and is recovering. You are looking for some sort of upside breakout.

So, where do you find such a share? In this article we would like to draw your attention to a high-quality share which may be worthy of your consideration. Read More