Teaching and Learning Forum 99 [ Contents ]

An investigation of the uses of depth of field in fine tuning strategic plays in the Australian Stock Market during the crisis of 1998

Paul Lucas
School of Information Systems, Curtin Business School
Curtin University of Technology
This paper identifies the role and use of depth of field in fine tuning strategic positions in the Australian Stock market. This study examines the performance of some shares taken from the Gold, Retail and Brewing sectors of the ASX during 1998.

Many investment companies touting for funds from the general public proclaim that time in the market is more important than timing in the market. The marketing claim is supported by research studies showing that over the long run (10 years or so) there is not much difference in performance measured by return on capital employed whenever a position is taken. ie it does not matter when you enter the market as long as you give it 10 years or so.

This paper discusses and disproves these marketing propositions and examines them in the light of the "Crisis" syndrome during 1998.

Moreover the importance of fine-tuning strategic plays using depth of field analysis is illustrated using a number of case studies taken from the Australian Stock Market during 1998.


Many investment companies touting for funds from the general public proclaim that time in the market is more important than timing in the market. This claim is supported by research studies showing that over the long run (10 years or so) there is not much difference in performance measured by return on capital employed whenever a position is taken.

In general, the industry purports that an investor can expect a return from the average share trust of 10-12% per annum over a 10-year period.

What the marketing people neglect to mention is that this is the average performance of the share index and not the results experienced by applying selective picks based on applied research and strategic analysis combined with using tactical timing plays.

This paper discusses some aspects of strategic analysis combined with tactical timing plays using depth of field analysis and stochastic concepts.

When investing in the stock exchange it is clearly important to look at historical trends over some defined period not only in the stock itself but also its relationship to the All Ordinaries Index.

This paper is organised as follows:

First the Strategic views of the All Ordinaries is explained. Second the Strategic approaches of the following companies - Normandy Mining Limited (NDY), Fosters Brewing Limited (FBG), Coles Myer Limited (CML), and Woolworths Limited(WOW) is explored and analysed. Third I explain the tactical approach using Stochastic concepts and Depth of Field using NDY as a case study.

Strategic views of the All Ordinaries Index

All Ords Index
Weekly closings with 13 week average - April 1997 to November 1998 (upper chart)
Daily high, low, close with 13 day average - March 1998 to November 1998 (lower chart)

Current Value:   2772  Approaching the upper bounds of trading range

All Ords Index

View: Having survived a test of the historic support at 2465, the market is now approaching the historic resistance at 2776-2868 - the upper bounds of the range. With daily and weekly averages in bull mode again it is likely that following a period of consolidation, an attempt at new highs is likely, with an early estimate of 2982 coming into focus.

Nearby Support: 2767, 2754, 2721;  Nearby Resistance: 2812-2815, 2825, 2857

Points of Interest:
Weekly Chart The index only needs to appreciate a further 2%-3% to enter the zone of historic resistance at the upper bounds of the wide trading range - an area likely to attract profit taking. Following a period of consolidation, a move to new highs is likely.
Daily Chart The feature here is the breakout from the downtrend extending from April 1998, which provides scope for a test of the highs at 2881, and a possible break to new record highs, following a consolidation phase.

Also below, the monthly charts supplied by JB Were Stockbrokers. They indicate the typical strength of the tax loss selling pressures, and shows the typically poor performance of the equity market during June and stronger performance during July (both in absolute returns and probability of the market returning a loss) since 1980.

From these charts it is clear that timing in the market is crucially important both in terms of probability of outcome and average monthly performance. Clear trading patterns emerge showing buy periods in FEB, JUN, OCT/NOV and sell periods in JAN, APR/MAY, JUL/AUG in particular.

All ordinaries performance pattern - percentage movement

All ordinaries performance pattern - probability

Having done the overall analysis on strategic timing plays so far as the All Ords is concerned it is now important to look at particular stocks and tactical plays using stochastic and depth of field techniques.

Strategic approaches of companies

When making any stock selection there are clearly strategic industry issues to be researched as well as technical stock performances to be investigated. Using as examples the stocks Fosters (FBG), Coles Myer (CML), Normandy Gold Mining (NDY) and Woolworths Ltd (WOW) below, we can appreciate some of the issues involved in stock selection.

Topical Stocks
FBG (upper chart); CML (lower chart)
Daily closings with 21 day average - November 1998 to November 1998

Topical Stocks

FBG:A$4.21View: The chart target @ $4.20 is now in hand but a review of the daily price action suggests that the current rally could stretch into the $4.29 - 4.58 zone, (avg. $4.44), i.e. +5%-9%, before profit taking caps the move. The run is sufficiently stretched in the short term that a stop loss <$4.10 could be used to lock in trading profits. The longer-term trend remains bullish.
Nearby Support: $4.16, 4.11-4.10, 4.06; Nearby Resistance: $4.25, 4.29, 4.44
CML:A$8.23View: An unfulfilled long-term estimate to the $8.25-8.41 zone is now within reach following the breakout above expected chart resistance at $7.30 or so. Although the longer-term trend remains bullish a short-term overbought condition is evident with the 13 day R.S.I. @ 83. Take part profits within the target zone.
Nearby Support: $8.05-7.95, 7.83, 7.74 Nearby Resistance: $8.29, 8.33, 8.41

Normandy Mining Limited
Hedge book restructure delivers $650m

Stock Code: NDY (149)
Normandy now has the funding capacity and the asset mix to deliver a steady growth in EPS.
The growth profile could be expanded further through offshore gold developments (Yamfo, Perama Hill) and Australian Magmetal.
Our valuation has been upgraded to $1.35/share (+6%).
KEY POINTS: $650m will be extracted from Normandy's existing book, such that a similar amount of hedging will remain (i.e. 4.3m oz), but at much lower deliverable prices. Short dated forwards will be converted into puts allowing upside leverage on the gold price.
The A$30/oz fall in the A$gold price since October has given Normandy a $100m additional benefit in this proposed hedge book restructure. (The marked-to-market value of NDY's book was A$550m on 30th September).
Net debt will reduce from $785m to $135m. Post the sale of the Power and Pipe division (expected soon). Normandy could move into a net cash position.
We believe Normandy's debt capacity will be preserved to fund its existing asset mix. In total, capital expenditure of $700-800m could be required to fund expansions (Callie, Vera Nancy) and new mine developments (Yamfo Sefwi, Wandoo and Magmetal).
In conclusion, this restructure is a smart move to capture the value of an intangible asset and prepare the balance sheet for a new substantial growth phase.

Investment Arithmetic

ASX Code:
Issued Capital:
Key Shareholder:
Latest Price:
1,699m ord.
Tiger Group 11.7%
12 month Price Range:
Market Capitalisation:
183 - 96

Year end June1997

Net Profit ($m)
EPS (diluted) ()
EPS Growth (%)
DPS ()
Yield (%)
Franking (%)
Production ('000 oz)
Cash Cost (A$/oz)
Zinc Price






Relative Price Performance vs. Gold Index:1 month
3 months
12 months

In analysing the selling of the Hedge Funds JB Were have notionally adjusted their impact on the financial statements.

Profit and Loss Effect

  1. J B Were have upgraded near term profits by up to 14% due to reduce interest payments.

  2. The profit from the hedge book was "amortised" over the next 10 years, matching the same delivery volumes and times as previously committed. Hence, the Normandy revenue will be unchanged, but it will contain a large "accounting" item of pre-earned or pre-received income.

Cash Flow Effect

  1. The loss of hedge premium will be offset by increased interest payments to some degree. The effect is to notionally reduce cash flow by $100m pa. Other effects resulting from the sale of hedge funds are:

  2. Net debt of $785m will reduce to $135m ($207m cash, $342m debt). Sale of the Goldfields Pipeline, which could raise $170m, will take Normandy into a net cash position.

Valuation Effect

  1. Subsequently the Share valuation has been upgraded by 6% to $1.35/share (+8/share) due to a higher realised value on the hedge book and accrued tax benefits.
When marked-to-market valuations matter

The market is continually told that marked-to-market valuations on hedge books don't matter, and yet, we now have the second major example that they do matter (the first was when Newcrest extracted A$300m from its hedge book in late 1996).

What prompted Normandy to sell the Hedge Book?

There are probably numerous reasons:

What is so smart about Normandy's deal?
  1. Timing has gained an extra $100m with the sharp decline in the A$ gold price.

  2. No tax is payable on the $650m because capital gains are offset against capital losses.

  3. The value of the hedge book has been realised, but price protection has been maintained.

  4. They have achieved a large funding base to acquire gold producing assets in one move.
Woolworths Limited
Weekly closings with 13 week average - December 1997 to November 1998

Woolworths Limited

Current Price: A$5.55  Testing the local uptrend.
View:The idea of a trading range continues to gain merit. Chart oriented investors may be inclined to take a buying stance during dips into the lower 1/3 of the developing range - say below $5.36.

Strategy - buy into expected support/sell into expected resistance.

Nearby Resistance: $5.57, 5.63, 5.75  Nearby Support: $5.43, 5.36, 5.23

Points of InterestThe idea of a "large trading range" is gaining merit following the sharp sell-off from the "pattern resistance zone" >$5.75. Fresh support could be expected within the lower 1/3 of the range, say <$5.36, and especially <$5.23 where an "accumulation pattern" was traced out during July/August '98.

Tactical approaches using Stochastic concepts and Depth of Field

Having done the strategic research to buy or sell any stock, there is still the question of exactly when to transact. The tactical problem can be simplified by using two concepts: stochastic and depth of field analysis.

Stochastic is a moving average indicator that gives some precision as to when a stock is in an oversold or overbought state. This normally corresponds to the 20 or 25 and the 75 or 80 percentile positions on a chart. Using the %d moving average a sell or buy signal is indicated. (See slide).

Slide 1 showing buy signal.

Buy signal

Slide 2 showing sell signal.

Sell signal

Depth of field is a feature of the Australian Stock market where open orders for buying and selling a stock are tracked on-line second by second. Analysis of this unique Australian feature of the ASX enables discerning tacticians to exit or enter at the right price for the day. Not only can prices at the margin be discerned but by noting the buyers and sellers entering or exiting the market lower down the open order list. When analysed over time, many broad strategic plays can be fine tuned, thus affording more realistic exit and entry points (See slide)

Slide 3 showing depth of field for NDY on Dec 1 1998

Superior results must be obtained when the strategic analysis of the Index and the Industry of the stock is combined with the tactical tools of the Stochastic and Depth of Field analysis. It is clear that timing in the market as well as time in the market is superior to the marketing hype, particularly when time and effort is expended into the analysis of the problem.

Returns of 50% plus per annum are consistently achievable, whatever the state of the market, provided the strategic quality of analysis and the tactical application of these tools is applied with rigour and discipline.

Please cite as: Lucas, P. (1999). An investigation of the uses of depth of field in fine tuning strategic plays in the Australian Stock Market during the crisis of 1998. In K. Martin, N. Stanley and N. Davison (Eds), Teaching in the Disciplines/ Learning in Context, 228-235. Proceedings of the 8th Annual Teaching Learning Forum, The University of Western Australia, February 1999. Perth: UWA. http://lsn.curtin.edu.au/tlf/tlf1999/lucas.html

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