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More To The Chart Than Meets The Eye

Some people get right into charts. For them, the price action contains all they will ever need to know about a stock.

For others, the charts paint only half the picture. They still want to check out all the financials as well. Then there are those who think charting is gibberish. To them, it’s nothing but a bunch of random lines drawn on a screen.

Whatever your take — even if you don’t use them at all — charts can help give a visual clue as to what is going on in the market.

Take the ASX 200 index for example. 12 months ago, it was see-sawing in a tight range. Eventually it broke higher in October, rallying strongly into the end of last year.

This year, the swings have become much bigger. Dramatic falls like the ones we saw in February and March, when the market tanked, were then followed by sharp rallies.

This kind of action can often precede a change in direction. The bulls and bears fighting it out until one side prevails.

So far this year, it is a stale mate. Despite a trading range of 400 points, the ASX 200 is around 50 points lower than where it started the year. In other words, as we approach the half way point of the year, the market has budged less than 1%.

That’s a lot of stress for investors with not much to show for it.

The increasingly big swings also reflect more nerves in the market. Last Friday’s payroll numbers in the US came in stronger than were forecast.

While an unemployment rate of 3.8% is a good thing — the lowest since 2000 (and 1969) — it also signals that the Fed might have to tighten rates more quickly than expected.

Higher rates will push up the US dollar — something that could put a dent in US exports. That could exacerbate something else spooking the market. That is, the on-again off-again trade wars.

The US already believes the trade deficit it has with China is too large. That was behind its announcements about tariffs. A stronger US dollar could further hamper exports, leading to an even bigger trade imbalance.

Higher rates also mean that money might flow off stocks and into bonds and other fixed interest investments. With such low rates on offer for so long, investors have needed to put money into stocks to generate anything near a reasonable income.

That’s why we have seen the US market also swing wildly this year. The 3,000-point fall in the Dow in February, plus a whole lot of smaller rallies and selloffs since.

Again, though, like the Australian market, US investors also have little to show for the roller coaster. The Dow has moved even less than the Aussie market this year. Barely at all, at less than 0.1%.

What these price moves don’t account for though, is one important thing. It’s also why charts, despite being such a valuable tool, don’t always give the full picture. That is, they don’t show the dividends you pick up along the way.

When markets are on a tear, and it seems like everything is going up, dividends are perhaps the last thing on people’s minds.

Yet when the markets start tracking sideways (or fall) — as we have seen this year — the yield generated by a company’s dividend can play a significant role in supporting their share price.

Take our lumbering banks. It’s hard to think of another sector in our market that has been under more pressure.

The Royal Commission has been a major overhang for over a year. For once, it seems regulators might have the upper hand. Especially in light of Austrac’s recent record $700 million settlement with Commonwealth Bank [ASX:CBA].

On top of that, the housing market has started to soften in the major capital cities. Less demand from overseas buyers, plus a crackdown on interest-only loans, has taken some heat out of the market.

The cost of funding their loan book has increased as well. Depositors only account for one source of banks’ funds. They still need to access funds overseas — something that will cost more as rates rise in the US.

All this negative news continues to pummel their share prices. If you bought Westpac Banking Corp [ASX:WBC] back in 2007, you’d be down on your purchase. Back then, it hit a high of over $31. More recently, it is trading closer to $28 — around 10% lower.

But once you include dividends, this turns around dramatically. From 2008, Westpac has paid out $17.52 in dividends. Including the loss on the share price, these dividends bring the total return up to over 50%.

With all the negative sentiment, right now might not be the time to buy into banks. The share prices continue to slide. Plus, their dividends could come under pressure.

But it shows that if you only look at the chart, you’re not getting the full picture. You need to include the dividends a company pays into your calculations as well.

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The Daily Reckoning's mission is to look at the investment world and the financial world in a sceptical and contrarian way. To do that day in and day out and tell you honestly what we see, even if it isn't always popular. If you'd like to subscribe to an alternative look at the mainstream interpretation of events, join for free here.



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