Technically Speaking

Friday 2nd June 2000

Text too small?

1. Alcohol and tobacco

2. Asian listings

3. Banks and finance

4. Gold

5. Healthcare and biotechnology

6. Property trusts

7. Telecommunications

If the New Zealand Stock Exchange (NZSE) does merge with the Australian Stock Exchange (ASX), we can expect to have a much wider range of indices to measure the market by. The ASX is particularly rich in sectoral indices that categorise companies by their industry type, seven of which are illustrated.

The NZSE has its own sectoral indices, which it rearranged a while back but in many cases the sectors are too thin for their indices to be of much use. For example, telecommunications listings are swamped by Telecom, the largest sharemarket listing, so the telecommunications index looks like the Telecom share chart.

Consequently few make much use of the NZSE sectoral indices, which is a pity because these sharemarket measures are handy for charting.

Chartists can approach using sectoral index graphs from the viewpoint of trying to identify a range of company types that warrant further analysis in their own right. A sectoral index is a basket of companies that all do much the same thing. Such an index is therefore a barometer of its industry.

Sectoral index charts speak volumes about the fortunes of the industry they represent and are a way of identifying what kinds of shares, broadly speaking, a trader should be paying attention to.

Sectoral indices can be graphed and analysed by technical indicators to see if they are overbought or oversold. In the charts this week the 40-day exponential average is shown.

As a general rule, indices trading below their 40-day average are oversold and when trading above the average they are overbought. The wider the divergence between the price and its average, the more extreme its overbought or oversold status is. Various strategies can be built around such charts. A contrarian, for example, would be looking for depressed value sectoral indices to identify a range of companies with likely low price/earnings ratios.

Sectoral indices can also be used as the basis for relative strength analysis of their component stocks. A company's share price chart can be divided by its sectoral index chart to produce a relative strength (RS) graph. The RS graph is read for its trend. If the trend is rising, the share is doing better than its industrial sector. If it is falling, the share is doing worse.

Again, there are different ways of treating such information. A momentum investor would want to buy shares with an RS graph on the way up, that is, outperformers. A contrarian would look for shares with weak RS performance to pick up cheap laggards behind the industry's broad trend.

The range of interpretation possible under technical analysis makes suspect the claims of "black box" merchandisers who sell supposedly foolproof systems. Technical analysis has a strong interpretive element that computers are unlikely to replicate successfully. Computer software can look for patterns arising from the sharemarket numbers that are its basic data but that is not the same as seeing the significance of such patterns and forming judgments about them. The difference is akin to that between perceiving a pattern of juxtaposed colours and recognising they comprise a meaningful work of art.

Certainly a merger with the ASX would be welcome if it meant New Zealand's skinny sectoral indices were augmented by robust transtasman measurements. Indeed, what to do with NZSE indices is an important question should the merger take place.

For one matter, there is the currency difference to take account of. Presumably transtasman indices would be based on Australian dollar prices.

NZSE indices could be kept as the New Zealand subset or sector of Australasian indices, but in the case of the NZSE sectoral indices, they are not a patch on the ASX sectorals so perhaps they could be scrapped altogether. Once the ASX sectoral indices did apply to New Zealand as well as Australian listings, New Zealand would have a significant improvement to the overall quality of sharemarket information.

This nico-Nazi government might reduce that information somewhat by banning the politically incorrect alcohol and tobacco index, so readers should feast their eyes on its chart for perhaps the last time.

Share prices for New Zealand listings could be affected by where they rank in transtasman indices.

Another implication of creating a transtasman market would be the likely increase of hybrid dual listings of Australasian companies where special shares were issued to make dividend tax credits available. One example on the NZSE is Westpac's New Zealand class shares, which have bombed since listing. They look distinctly like a second-class citizen, having been excluded from the buyback offer applicable to the bank's Australian class shares.

The non-recognition transtasman of Australian franking credits and New Zealand imputation credits remains a sore point that needs to be worked on at the political level and will be highly topical if a merger occurs.

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