

Medibank Private gets hit by RSI attack

Trevor Sykes
Trevor SykesColumnist

ack in the 1980s there was a brief outburst of a physical complaint called RSI, which stood for repetitive strain injury. RSI was supposed to attack victims who were employed to perform repetitive tasks, such as typing, and so became prevalent in the media.

The disease was particularly severe among those least likely to suffer. Old-time journalists never complained but young reporters who had been working for less than a year would arrive at union meetings with bandages on their wrists.

As the plague only lasted for a couple of years, it must have either been cured or became unfashionable.

Time for the relative strength indicator, which can be useful for determining when sentiment has overshot. Richard Drew

RSI has enjoyed a rather longer survival in the sharemarket, where the initials stand for relative strength indicator. The sharemarket RSI is a useful tool for indicating which stocks have been heavily oversold.

It is best calculated by technical experts using computers, because it plots the rate of change in closing prices daily over a set period. The data is then indexed to fit within a range from zero to 100.


Readings of 25 or less indicate which stocks have been oversold. Punters can then buy those stocks in the hope of a short-term bounce.

Rather like the plague that unfolded in news rooms, the sharemarket RSI tends to be short-lived. Every now and then the market undergoes a panic attack when punters begin unloading, rather like lemmings taking their annual outing off the top of a cliff.

Take advantage

On those occasions, the RSI signals which stocks have been oversold, and alert punters should buy quickly to take advantage.

Veteran chartist Russell Lander, writing in Ord Minnett's Market Perspective, observed that the RSI "says little about the medium-term prospects of a given stock. It simply signals an opportunity to buy when there has been indiscriminate selling pressure, driven by emotion".

Sage advice. The fact that a stock is oversold indicates it might bounce short-term, but it's not inevitable.


In several recent instances, the indicator has been correct. Adelaide Brighton, Boral and AGL Energy were all tagged as oversold by Lander and all bounced nicely in the next few days, proving that at least a few investors follow his advice.

But Medibank didn't. Medibank has broken its uptrend in the first half of calendar 2016, which saw it peak at $3.28 in May. The stock went sideways until a month ago and has since slumped to about $2.40.

As MPL tests support around $2.35, it looks oversold on an RSI of 21. Maybe it is oversold, but it could equally well be finding its right level.

At its peak, Medibank was on a price/earnings multiple of more than 21 times earnings. It's now down to a more sensible 16 times earnings.

Bear point

The bear point is that Medibank is actually two businesses. The Medibank brand offers customers the full laughing, singing, dancing health coverage, whereas the bare-bones ahm business offers basic cover. Customers are tending to migrate from Medibank to ahm.


Maybe the lower-risk customers in ahm will be more profitable than the higher maintenance Medibank customers, but we don't really know yet and it will probably take a little time to be sure. Meanwhile the market may just be keeping Medibank safe.

The market's RSI moment seems to have passed. When it will come again is unclear, but keep an eye on your favourite chartist.

Lander adds: "By way of interest, RSI is of little use in calling market tops because uptrends can be protracted whereas corrections tend to be like sink-holes. Thus readings of 75 or more can obtain for extended periods."

So RSI is only useful at times when sellers lose the plot. But in this market we need to take every opportunity we can.

Stay alert.


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