This post formed the basis of an article which then appeared in the Australian Financial Review on 26 July 2016. Michael Gable is a regular expert contributor to the AFR. You can access the AFR version HERE.
As we approach reporting season in August, it pays to check how your share investments are tracking. The seasoned investor would be aware that nowadays a good result is not enough. Companies need to meet or exceed the market’s expectations in order for share prices to continue higher. In the lead-up to full year results, if a stock gets too expensive and its trend starts to weaken, then it could be vulnerable to a sharp sell-off. REA Group is one such stock that I would be cautious about at the moment.
REA Group has caught my attention for how far it is trading above consensus targets. When I look at the several brokers who cover the stock, the average price target is under $55. Having traded up to that level in June, it then started to rally even higher. This rally in the last several weeks has seen it move to the mid $60’s, almost 15 per cent higher than the average broker target. During this recent rally, I have noticed that the amount of volume traded has been decreasing. This is telling me that as the shares go higher and higher, the conviction has been getting lower and lower. As a result, this near vertical move has seen our momentum indicators flash into overbought territory (circled on this weekly candlestick chart). A stock can continue looking overbought for a while, but my concern is reporting season around the corner. The market seems to now be factoring in a very good result. If expectations are exceeded, then much of that “surprise” is likely already to already be factored in. My concern is if REA Group merely comes in line with expectations, or worse still, falls short. When I look at the chart, I can see some good support back near $55, and if that is breached, then near $48. I couldn’t be chasing REA Group up at these levels. My advice to clients is to wait first for their results in August.
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