Is M&S a buy or isn’t it? – 2nd April 2009

Is Marks & Spencers a buy or isn’t it?

At ShareHunter we have been very reluctant to offer any buy/sell alerts over the past few weeks. The reason being that we do not wish to accept for ourselves nor put our members in line for the increased risk that is present when buying or selling shares when the underlying market trends (the intermediate trends) are so volatile and at odds with each other.

The dominant trend of all of the major market indices is still down. The increases of the last few days are, so far, nothing more than a (strong) rally within the main downtrend. Of course that could change soon and the markets could swing into a ‘Stage 1′ Accumulation* phase but that has not happened yet and so we accord with our ‘safety first’ approach and refrain for giving ‘buy’ alerts until the market index has swung out of its ‘Stage 4′ Downtrend* mode into, at least, a ‘Stage 1′ Accumulation phase.

The point being that when the market is in downtrend any share that is showing uptrend tendencies can suffer quick reversals and so cause a loss or can just continue to move sideways and produce no price increase or profit.

Marks & Spencers’ shares provide an excellent example. The shares have just enjoyed a big price hike. Many have bought but we have not yet given it as a ‘buy’ alert even though the share price has now moved into an early ‘Stage 2 Uptrend’* phase. We will give it as a ‘buy’ only if/when the FTSE 100 moves from Downtrend to Accumulation trend.

Look at what has happened with M&S (FTSE 100 – mks) shares -

 After the strong uptrend from Oct.’05 to Dec.’06 the share entered a Stage 3 Distribution* trend. This was then followed (as a Stage 3 usually is) by a Stage 4 Downtrend* which lasted from July ‘07 to July ‘08.

From July ‘08 the share price has meandered along sideways in a Stage 1 Accumulation trend with buyers and sellers in more or less equal proportion.

It is now, at point ‘C’ on the chart that the share can be considered as a possible buy. BUT, firstly it always involves extra risk if there is no meaningful increase in volume (and there isn’t) to support a sudden rise in price. Secondly, the main FTSE 100 index (of which MKS is a part) is still in a (mature) Downtrend so ShareHunter cannot give a ‘buy’ alert for MKS shares. The risk involved in buying now, before the main market trend has turned and is in ‘sync’ with MKS shares, can be seen from the chart:

At point ‘A’ in June ‘04 there was a similar large price hike coincident with an increase in the volume but it all came to nought – the price then just meandered sideways for 15 months (June ‘04 to Sept. ‘05). The reason – the dominant trend of the FTSE 100 at the time was a ‘Stage 3′ Distribution trend. So the main market was moving sideways and this trend did not support the start of a new uptrend for the share – just as it doesn’t now with the main market trend being a downtrend.

But then look at another similar price hike in M&S shares in Oct. ‘05 (at point ‘B’ on the chart). There was a less defined increase in volume but again the price rise took the share price up and through resistance. There the followed a glorious ‘Stage2 Uptrend which lasted until Jan.’07. The difference was that this time the dominant market trend (of the FTSE 100) was also a strong ‘Stage 2′ Uptrend so the share was in close synchronisation with the main market trend.

And just because we wait for the main market trend and the trend of MKS to move into line with each other does not mean that we miss out on “getting in early”. There is too much risk involved in getting in so early and very little gain to be missed if we wait until the main trends all move into uptrend. There will always be sufficient strength of a full blown Stage 2 Uptrend to provide serious profits with lower risk.

*For a detailed explanation of the 4 Stages please click on ‘Weinstein Analysis’ in the menu on the left hand side of the page

AGS

ShareHunter

02.04.09