Market Commentary for July 2019

"Bullish for the rest of 2019 and black swan events... "

By Alan Hull

This commentary is in part or entirely created using extracts and comments from my weekly Blue Chip Report. For more information about the Blue Chip Report, including subscription details and a recent sample report, go to Blue Chip Report

Last month I said....

I certainly don't have any special insights into the U.S. China trade relations but barring an all out tariff war, I think the current bullish trend will continue for the rest of and overseas.

And June has seen a strong recovery in the U.S. markets which are now threatening to break out into blue sky. So I am bullish for the rest of 2019 and I have my money spread across both the Australian and the U.S. markets. And whilst our local market continues to rally, we are still being troubled by what I call black swan events...the sudden and severe collapse of a share price.

And I am not talking about small to midcap stocks, but well established companies with market capitalizations into the hundreds of Millions. Take for instance the recent case of Vocus Group (VOC). Let’s start by rewinding several weeks to see what this stock looked like back then. On the 24th of May Vocus Group was listed on my Blue Chip Report's sharelist and it’s chart pattern was a nice steady trend...

Then a positive event occurred...Vocus received a takeover offer from EQT at $5.25 per share. Predictably the share price spiked on this news and it was happy days…

But then things got a little weird with EQT withdrawing from the process and AGL taking their place with an offer of a cash settlement at $4.85 per share. AGL commenced due diligence on the 11th of June but then they terminated discussions with Vocus on the 17th of June. Not a good look…

So when the EQT offer was dropped the share price fell back to the trend line (the big black candle)…and this is what I would expect. Then the AGL offer came into play and the share price moved sharply higher again…and this is also what I would expect. But then AGL withdrew from discussions and the share price collapsed down through the trend line…this I did not expect.

This is a technical failure of the preceding trend and therefore an exit signal. But the other key feature of the above chart is the absence of a rebound off the extreme low just above $3.00. Markets overreact and this is what has happened here. But you can also normally expect to see a rebound rally driven by bargain hunters.

This lack of rebound is very much in keeping with other major corrections we have seen of late. One that comes to mind is New Hope Coal (NHC) where the share price collapsed 25% in a single week back in March. There was no rebound rally, with the price just drifting lower. Then there is the very current example of SPEEDCAST (SDA) which is suffering a nearly 40% drop in it's share price while I'm writing this commentary, in response to downgraded guidance for FY2019. Don't expect it to bounce back!

These extreme events are becoming so common in our local market that I should stop calling them black swans. And there are a couple of key points to note for investors and traders. Local blue chip shares can collapse rapidly & unexpectedly and don’t hang on to them, hoping for a rebound. I also recommend diversifying into the U.S. Stockmarkets as well because they are outperforming the rest of the world and I expect black swan events in the U.S. markets. Thus if I'm going to suffer the pain...I want to maximise my gain.