Analysis shows unusual volume before Alcan bid

You may have seen that mutual fund commercial on TV in which a fund manager sends a team of analysts to Finland to examine the fundamentals of a Finnish tire manufacturing company.

A company official issues a compelling story to one of the analysts: "Nobody makes winter tires like us Finns."

One analyst is overheard commenting, "We can't invest in a small market like this. ... Who else but you Finns needs winter tires eight months of the year?"

Another analyst scans the horizon with a set of field glasses and notices the border of a country with a huge market: "That's Russia over there, isn't it?"

That fictitious tale, created by Grey Advertising of Toronto to sell AIM Trimark Investments, shows how solid fundamental analysis can be an important part of the investment decision process.

In the real world of investing, fundamental and technical analysts do the same work, trying to solve two investment mysteries: Is the value of a stock, bond or commodity trending up, or is it heading down? And what is the turning point, when it will stop doing that?

The key is to discover the trend early so you can acquire the investment before the compelling story draws in everyone else, creating an investment stampede.

It looks like two Hong Kong residents, Kan King Wong and his wife Charlotte, made such an early discovery when they bought 415,000 shares of Dow Jones & Co. stock, worth $15 million (U.S.), in the two weeks prior to the May 1 announcement that News Corp. had offered to buy the company.

After the announcement, the value of Dow Jones stock rose 58 per cent, giving the couple a net gain of $8.18 million.

The U.S. Securities and Exchange Commission accused the couple of "highly profitable and highly suspicious" stock purchases based on inside information that amounted to "widespread and unlawful trading activity."

Or, perhaps they were simply smart investors, who after spending time analyzing the company's fundamental or technical situation, decided to make the stock purchase just before the announcement of News Corp.'s $5 billion bid.

Last Monday, Alcoa Inc. said it would make a hostile bid for Canada's Alcan Inc. for nearly $27 billion, after talks between the two aluminum producers failed to lead to a deal.

If successful, the bid would create the world's largest producer of the metal. The "surprise" announcement drove Alcan's shares well beyond the bid price and they ended up 34 per cent at $82.11 (Canadian) at the close of trading on May 7 in Toronto.

Technical analysis of stock trades reveals purchases by investors who appeared to be as well informed about Alcan as the Wongs were about Dow Jones.

The first clue of unusual interest in the shares is found in the new 52-week high list. Following weeks of quiet trading, Alcan shares posted a series of new 52-week highs in the two weeks preceding Alcoa's announcement.

This is important to technical analysts who understand that volume and price changes precede fundamental information. In the case of Alcan, there was a notable increase in volume and price on six days preceding Alcoa's announcement – Feb. 13, March 1, April 24, April 25, May 2, and May 4. On each of those days, Alcan shares advanced, accompanied by almost double the average 90-day volume.

Technicians can follow price/volume relationships by applying an on-balance-volume study to any purchase candidate. OBV was introduced by Joe Granville in 1963 and is one of the first and most popular indicators to measure positive and negative volume flow. The concept behind the indicator is that volume precedes price.

OBV is a simple indicator that adds a period's volume when the close is up, and subtracts the period's volume when the close is down. A cumulative total of the volume additions and subtractions