How to Tell a Stock (and the US Economy) is Strong

On 30 June I profiled a company in one of my short ASX share price updates. These price updates are just a brief comment on an individual stock posted to Markets and Money website. The company I profiled that day was Catapult Group International Ltd [ASX:CAT].

During the month of June, Catapult Group released no significant news and the share price wasn’t doing anything at all. For the whole month it simply went sideways. To many observers this stock may have looked uninteresting.

But to those with eyes to see, the chart was far from uninteresting. In fact, it was a stock to watch very closely.

This is because during the whole month of June everyone was selling their stocks. While there was tumult in the general market, Catapult Group it seemed, was unaffected by it all.

When I made that post on 30 June, the All Ordinaries was breaking lows (see chart below) and there was a lot of negative sentiment in the financial press.

All Ordinaries Index [ASX:XAO] Daily Chart

Source: STEX

Click to enlarge

If the All Ordinaries is breaking lows and you by chance come across a stock going sideways, unaffected, then that should interest you. A lot. Why?

The chart below of Catapult Group tells you why.

Catapult Group International Ltd [ASX:CAT] Daily Chart

Source: STEX

Click to enlarge

You may have missed Catapult group. It may have gone completely under the radar. It is only a small stock, thinly traded on the ASX. But it leads me into the stock I really want to talk about which is James Hardie Industries PLC [ASX:JHX].

Now this company shouldn’t go under the radar, it’s not small or thinly traded and you should have noticed this stock was seemingly unaffected by the recent tumult in markets during the month of June.

James Hardie Industries [ASX:JHX] Daily Chart

Source: STEX

Click to enlarge

From the high in early June this stock has simply gone sideways. That should be enough to make it of interest. But can you also see, that all through the Greek crisis and while the rest of the market seemed to be in free fall, this stock continued to make a series of higher bottoms.

Everyone was offloading their stock at the time. All except James Hardie shareholders it seems, who were quite happy to hold.

It’s telling you the stock is in strong hands.

Can you see that reading the charts is really helpful?

Get the news before reading it in the papers

James Hardie essentially manufactures fibre cement siding, used in residential construction. The bulk of the company’s earnings come from the US operations. Therefore, this company tells you a lot about US housing starts.

Throughout 2015 James Hardie has been in a strong uptrend and continues to make new highs. US housing starts are up. I don’t need to read that in the press or wait for the official figures. And if US housing starts are on the up, then all that construction is a tremendous boost for jobs and the US economy.

Several months from now, expect to be reading that US housing starts are setting some sort of record and that the US economy is in reasonable shape.

The chart of James Hardie is telling you this, months in advance before it makes the news headlines.

They say it can’t be done

Most experts say that you can’t forecast the economy. However, the strong rise in James Hardie shares was entirely forecastable.

I don’t have a crystal ball, but I am familiar with the work of Homer Hoyt and Roy Wenzlick.

Who are these guys and why should you care?

Firstly, let me answer that you should care because your investment success, or lack thereof, utterly depends on it. Secondly, these guys studied history; specifically they studied the history of land price and sales.

What they found was this. The real estate cycle simply repeated. And it repeated in the same set sequence and time frame.

Hoyt and Wenzlick’s knowledge has been distilled in our 18 year real estate clock. It told us in advance to expect a rapid expansion in new construction. Therefore, you could have been positioned for a move in James Hardie shares. Valuable knowledge to have is it not? To know in advance which sectors are the next to move go here.

It is land price that drives the cycle, however few understand this. Let me give you an example.

At an economic conference I attended last year, speaker after speaker talked about central banks causing the boom-bust cycle. Typically they suggested that after the inevitable bust, central banks would all drop interest rates, starting off another credit fueled boom. As usual the well credentialed economists all missed one thing. The very thing they were standing on.

It is not lower interest rates which starts the next boom. It is lower land price.

After the recent global financial crisis, (land led downturn), land prices in most countries around the world plummeted to more realistic levels. Mortgages then become a whole lot cheaper.

When mortgages become cheaper, there is more money left over to spend in the wider economy.

Business conditions improve. Businesses start hiring more people and on it goes…and then we find we are into the next cycle.

Central banks don’t drive the economy, they react to it. It is land price which drives the economy. More specifically, it is the speculation to capture the increase in land price. It’s important for your investments to understand the role land plays in the economy. Cycles, Trends and Forecasts is the only service that will teach you this.

By using James Hardie as an example, I hope you see what we do at CT&F. We read the charts not only to judge individual strength or weakness of a particular stock, but also to read the broader economy. Few do this.

James Hardie Industries is in a strong position. More broadly, it’s indicating strong figures in US housing starts and therefore continued job growth and improving US economy for the latter half of 2015 — despite what you may read to the contrary in the financial press.

Then we lay all that over our 18 year real estate clock. The recent run in James Hardie simply confirms our real estate clock and confirms where we are in the cycle.

More importantly we know what to expect next for the economy and the likely sectors ready to move.

They say it can’t be done, that you can’t forecast the economy. But those who have studied land sales and values, have shown you can.

To know which sectors are the next to move and to time it all to your advantage, go here.


Terence Duffy

For Markets and Money

Join Markets and Money on Google+

Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come — which he details in Cycles, Trends and Forecasts.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money