• Christopher Hall

The Playbook: Capturing the silver lining of Market Pull-backs

Volatile markets can spook many investors, but when you know what to look for, the opportunities are more prevalent. When the dust settles, the new market leaders have moved to the front of the pack, ready to continue advancing further in front.

The Australian market has rallied after the February 2018 fall - how investors act next, to find the market leaders is what matters most.

Here’s the playbook to spot the best investments out of a Market Pull-back.

During the market fall:

  • You assess your portfolio after markets fall, crumble or falter.

  • You’re that bit warier of which companies to buy.

Rising from the Ashes:

  • Eventually the market will rally, rising from the ashes of the fire that brought it down.

  • The first rally normally has more speed and less tact. It’s wide-spread and normally lasts four to ten days before the stumble happens. The stumble is when it gets interesting.

Always a leader:

  • The stumble within the market’s initial rally signals opportunity.

  • Weaker companies will fall back to the ashes and wallow.

  • Stronger companies resume the rally and continue to rise.

  • The strongest companies are in a good collective. The best companies are marching north with their peers; the companies in the same industry, sector or investment theme.

  • There will be a dominant company within that group – the leader

How to spot the Leader:

  • The leader is stronger than the others.

  • Leaders rise faster and further.

100 years of markets show that:

  • The leader’s position in the market is often dominant and they can be the pioneer behind the new direction of the industry, sector or theme.

  • The volume traded in the leader is markedly greater than before their rally started and notably greater than that of peers within the same group.

  • Leaders are the companies pushing through trading resistance, barriers and hurdles, far before their industry peers.

Investments to avoid

Former leaders – the companies which dominated the previous market cycle are often over-loved. Their former glory maintains the expensive ‘priced for perfection’ badge. Ultimately the badge is removed, leaving behind a lot of investor pain.

Flounders – After the initial rally, more companies fall back to the ashes. In the early stages, rallies are more volatile, fuelled by fresh scepticism from the recent fall. The number of buying opportunities increase because of this renewed scepticism. In these early stages, if a company is bogged down with scepticism while its peers are soaring, the odds are against this company. Cut it.

Me-Too Companies – Late in the cycle new comers will enter the industry, sector or investment theme. These companies enter the industry quickly by a take-over of a dormant company shell on the ASX, change their name to match the investment theme or redirect their efforts towards the new vogue. These companies are less likely to have the market share, ideal resources, premier contracts or industry thought-leaders and know-how to capture the full move.

Better investments are available elsewhere.

Next Steps

Identifying market leaders is time consuming task.

However, through monthly research Talking Stock reports on the top performing companies on a fortnightly program.

View Talking Stock here.

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