Two questions all investors should ask before buying
Iron ore was $228 in mid-July but then China announced it was cutting steel output and by September 22 iron ore fell by more than 50% to be trading just under $100. Over the same period, Australia's big miners fell away with BHP and RIO down around 30%, while FMG is down more than 40%. Given this, many investors are asking whether they should be buying the big miners right now.
Investors like to chase a bargain and when a good stock has fallen heavily, it can present a good opportunity to enter while it is undervalued.
That said, investors tend to buy too early only to find they have caught a falling knife, as they watch the price of a cheap stock continue to fall.
Given that BHP, RIO and FMG are all effected by the iron ore price, the first question investors need to ask is whether the price of iron ore has stopped falling, which I don't believe is the case.
The second question investors need to ask is whether the price of the stock has also stopped falling. Unfortunately, many investors get this wrong because they look at how far the price has fallen compared to a few weeks or months ago to determine if the stock is a bargain.
Take RIO, for example, it was $137 at the end of July and last week it had fallen to $94, with some investors buying into the stock believing it was cheap, pushing the price up to around $100 this week. But has RIO stopped falling? Maybe, but we can't confirm this just yet.
We are also yet to confirm if iron ore has stopped falling, as it is possible it could fall another 20% in the coming weeks or months, which is likely to impact the share price of BHP, RIO and FMG further. That said, I believe we have already seen the price of these stocks fall 80-90% of what the total impact will end up being.
Given this, while investors should start to get excited about the impending opportunity, it is still way too early to be buying these stocks. The time to take advantage of these lower prices will most likely be in November but this will only be confirmed when we know they have stopped falling.
The best and worst performing sectors this week
The best performing sectors include Energy, which is up more than 6% followed by Financials and Utilities, which are both up more than 1%. The worst performing sectors include Information Technology down more than 5% followed by Healthcare down more than 4% and Materials down almost 1%.
The best performers in the ASX/S&P top 100 stocks include Orica up more than 14% after brokers updated their target expectations for this stock. This is followed by a2 Milk up more than 9% and Oil Search up more than 8%. The worst-performing stocks include NextDc down more than 11% followed by Afterpay down more than 8% and Xero down more than 7%
What's next for the Australian share market
The Australian stock market has once again exhibited indecision given that it fell away this week to trade lower than it did last week only to rise back up to near where it opened for the week.
While this is a good sign, as I mentioned last week, I am not getting too excited just yet.
The all-time high on our market occurred on August 13 and by Wednesday of this week the market had fallen nearly 6% although I suspect it has further to fall.
We are in the timeframe for the low to occur and despite the market showing some resilience in the last past week, I don't believe the All Ordinaries Index has fallen enough in price to confirm the low. I expect the low to occur anytime from now until mid-October or possibly a little later with my target below 7200 points.
Many stocks are looking quite attractive right now although I urge investors to exercise caution in the short term until we have confirmation that the market has turned. Those who are patient will be rewarded as they are many good buying opportunities likely to appear in November.
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