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By now many of you will be aware that the Australian Securities and Investments Commission has decided, in its wisdom, to extend the ban on short selling of financial stocks until 31 May 2009. The ASIC website explains the process of their decision making as follows:
In making its judgement to again extend the ban, ASIC weighed up the continued volatility in global financial markets and potential damage from aggressive or predatory practices from short selling against the possible loss of some market efficiency or price discovery.
It is interesting to note how effective this ban has been since its introduction on Sunday 21 September 2008 in supporting the prices of these financial institutions against ‘aggressive or predatory practices.’ ANZ on Monday 22 September closed at 19.15 and on 9 March (yesterday as I write) at 12.53, a fall of 35%. Over the same period CBA experienced a fall of 40%, NAB 34%, Westpac 36% and Macquarie a healthy 54%.
In the case of ANZ, Westpac and Macquarie, the prices at which they traded on 22 September, the first trading day after the ban was introduced, have been higher than at any time since. In the broader market, as measured by the ASX 200 index, the fall over the same period has been 37%, but 26% was during the general ban on short selling which lasted from 21 September to 13 November 2008.
2 points seem clear from this:
- The financial stocks have fallen broadly in line with the overall market, notwithstanding that their ban on short selling has been extended;
- The lion’s share of the falls in the market happened during the ban on short selling, suggesting that it was the cyclical forces in the market that caused prices to fall, and that short selling was a scapegoat.
WD Gann was forthright in his condemnation of excessive regulatory intervention in the stock market in the 1930s. He warned that it the long term it would make the markets weaker. Sometimes it seems, as someone once said, that ‘the only thing we learn from history is that we learn nothing from history.’
Certainly there has not been much joy for investors in the banking stocks, and not a lot for traders either, as the best trades have been on the short side of the market. However, it is well to remember that the market is cyclical, and that every down move is followed by an up move. It is the law of action and reaction. Our market has been in an overall down trend for 16 months now and this section of the bear market is looking very mature. While I do not for a moment believe that we are seeing the end of the falls, nevertheless over the next couple of months we should see the shorter term trend change to the upside. So now is a good time to start preparing to find those markets that are in a relatively stronger position.
Since we are talking about the banking stocks, let’s see how they have been faring recently in comparison with the broader market. The ASX 200 index made a significant low on 21 November 2007, which it broke in the first few trading days of this month, March 2009.
Chart 1 – Breaking the November 2008 Low
click chart to enlarge
So if we can find any stocks that are trading above their November 2008 lows, we have a market that is showing strength relative to the overall market. Chart 2 below shows the 4 major banks.
Chart 2 – Performance of the Major Banks
click chart to enlarge
If you look closely at these charts you can see that ANZ broke its November low in January, but not by much, and has found good support around that level. You can read Noel Campbell’s article in the February edition of this newsletter for some detailed analysis of that stock.
CBA was weaker, as it broke its November low in December and then again in January, but has been stronger since then and is currently trading above its January low. NAB is easily the weakest of the four, being the only one to break to new lows this month. And finally Westpac has seen the best support, forming a double bottom with its November low 60° later on 23 January.
Now if you care to search through some stocks for yourself you will easily find some that are in a much stronger position, but this should give you some idea of what to look for. This is preparing for the future. We have not yet seen a turn in the overall market, but when it comes you want to be prepared to take full advantage of it and get the best ABC trades in the strongest stocks.
Knowledge is power!
Tim Walker
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