Читать книгу Market Trading Tactics - Guppy Daryl - Страница 7

When we check our financial health we reach for our wallet. Many market participants check the price chart in the same basic way.

‘What causes a stock price to go up or down?’ asks a self-confessed rookie trader in any one of the trading chat rooms. Another passenger in the same boat ‘SS StockRookie’ suggests that price might be linked to demand for products the company makes. Either they are purchased or they sit on the shelf and this affects the price of the company in the market, he suggests. This thinking implies a link between the line on a price chart and the financial health of the company. In this understanding the price chart morphs into a balance sheet in graphic form. The daily cash value of our wallet is put into a graph.

This unsophisticated explanation is usually dressed up more attractively by brokerage analysts. Takeover deals are sometimes described in glowing terms – a marriage made in heaven. Other analysts tell us the deal creates a synergy of size and market share, and analysts include figures to prove it. All too often the result is a slide in share price.

Attractive in its simplicity as this line of reasoning may be, when stripped to the basics the picture is less pleasing. Ashton Mining shows the unattractive side of this simple explanation. It is a diamond producer and explorer working in the Kimberley region of north-west of Australia. Figure 1.2 shows a price chart of Ashton Mining in a standard bar chart format. In this five-month chart period the price of Ashton Mining varies dramatically. In 12 days from point A to point B, Ashton Mining adds 23 percent to its market value. The price increases from $1.74 to $2.15.

Figure 1.2 Financial health? Ashton Mining, Australia Daily bar chart

What does this tell us about the health of the company, about the strength of its management, the size of its inferred diamond resources or the state of the cartel market for its products? We can speculate a great deal on this, but it is very difficult to establish a precise relationship between changes in any of these fundamental factors and the share price.

Perhaps they did add significantly to their inferred resource estimates. Perhaps, in this instance, we can accept an increase of 23 percent in the underlying value of the company over 12 days, no matter how improbable it seems.

However, five weeks later this prosperous company loses 19 percent of its value in six days, plunging from point C to point D – $2.11 to $1.71. We are justified in asking if the diamonds added to inventory in December were found to be paste in February? What does this price action tells us about the health of the company, its management and its markets?

To add more confusion to contradiction, the price rockets back to beyond its old level and after nine weeks has grown 37 percent, rising from $1.71 to $2.34 as shown by the rise from point E to point F. Perhaps improved security procedures meant diamonds were no longer being smuggled out the front gate, or that reserve estimates had been upgraded again.

These wild swings in a basically sound company confirm our suspicions that the price chart tells us little about the health of the company. Market price is an accountant’s nightmare. The dedicated fundamental analyst, at this point, throws up his hands in disgust and despair, wipes every chart from the screen display, and returns to the raw balance sheet numbers pitting his estimate of the wallet cash value against the market price.

The analyst does this by de-constructing the wallet. The process is described in many articles on how to read company reports, and understanding the balance sheet. They are studded with explanations of ‘tricks of the trade’ and warnings that a more comprehensive assessment of the financial position requires an analysis of financial statements. Each step takes the trader further from understanding today’s market price for the security. The final calculated figure of ‘fair value’ is not consistent with the price printed in the stock pages so we turn to another attractively simple explanation to explain the discrepancy. In the simple version the calculated figure is used to decide if today’s market price is under or over valued.

The further we go down this path, the more subjective the result becomes because vital financial information is hidden, or unavailable, to everyone who wants to attempt these calculations. Many Exchanges now ask for full or continuous disclosure, but this does not apply to commercially confidential material so the analysts must guess at what is concealed. The better analysts often get it right and are paid accordingly.

Getting it right does not mean picking the current market price. This style of analysis is used by brokerages to ‘price’ an initial public offering (IPO), or ‘float’. They have full access to financial details that under other circumstances they can only guess at, or imply from other public documents. They almost decide what goes in the wallet. Yet, the first trades on listing show some spectacular differences between the brokerage valuation and the market valuation. Even in a bull market where a new IPO seems to list every second day the valuation gap remains. Typically, after 12 months about 30 percent are trading at less than their listing price and 60 percent are trading above, while around 10 percent are going nowhere. It makes little difference if the listing is on the New York Stock Exchange (NYSE), the French Stock Exchange, in Hong Kong or Singapore. We tend to remember the spectacular successes, unless we are unlucky enough to have bought stock in one of the losers.

This style of analysis has an important place, but we need firmer footings when we approach the market with trading on our mind. I am suggesting that it is less useful from a trading perspective in the same way that the official valuation on your house bears little relationship to the price it brings on the open market. If you use price charts as a measure of the contents of your wallet, then you miss the advantages charts bring to trading.

Going back to our wallet explains why. If we lose our wallet the insurance value is more than just the cash inside. It includes the credit cards, the sentimental picture, the ticket stub and the PIN card access number ineffectively disguised as a fax contact. It includes some measure of the potential future value of the wallet to the thief, particularly if he uses our credit cards. We readily accept different measures of value and apply them in different circumstances.

The price chart records the insurance value rather than a daily count of the cash in the wallet. The chart display is a barometer of the market’s feeling about the company and the potential future resale value of shares purchased today.