THE NATURE OF THE BEAST

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peterloh

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Monday, February 06, 2006 - 11:06 am:

Volatility - yes, bear market no.

As we reach record after record, volatility will increase and the traders without a plan will be shaken out.
Where investors/traders venture beyond, attempting to ride the momentum, a sharp correction will cause by only a slight disappointment will see the SP taking a tumble.
Normally at this time it is good to be cautious. I have use diversification and some value shares to manage my risk even fully invested as I cannot time the market to perfection but hoping to ride the bull market all the way as Nightstalker says "till it bends".
If I have taken an over cautious and taking short term profit each time when there is a retracement, I would have miss out on the most important spurt in the price as I cannot forsee and time my entry and exit to perfection.Also when a bull market commences, it does not boom one year and burst the next, it will continue for a few years before a year of minor retracement and the market continue its merry way again.This is as I see it.
For every success story, there is many heart ache and failures along the way, so for new traders, it is very important to bear this in mind.The XAO chart below tells the story.

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Disclaimer: Please note that comments made in this column is mainly for the interpretation of charts in technical analysis. It is not made in my professional capacity and should not be taken as advice.In my professional capacity I am only allowed to give advice on certain managed funds authorised by my license dealer.Any share discuss is for general interest and should not be relied on to make an investment decision.It is likely that I may own the shares that we discussed as a trade or as an investment. Please consult your stock broker or financial adviser in regard to your personal situation.

The views expressed here contain information derived from public available sources that has not been independently verified.No representation or warranty is made as to the accuracy, completeness or reliability of the information.Any forward looking information in this representation has been prepared on the basis of a number of assumptions which may prove to be incorrect.It should not be relied upon as a recommendation or forecast by the writer.

peterloh

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Tuesday, February 07, 2006 - 01:08 am:

For many of you that has been around and trading for some time will well remember that prior to October 1987, the resources sector was the biggest sector in the XAO.Post Oct 1987, the financial sector became the dominant sector.Will the resources sector reclaim its prior dominance?
My personal belief is, that the demand of resources is no flash in the pan. It is here to stay. China is currently going through an industrial revolution which was experienced by the United States and Europe many years ago.The GDP of China may decline a couple of percentage point but will not grind to a sudden halt.We have not heard the end of the resource and energy story yet and it is here to stay for some time.China's demand for resources is not merely for the production of consumer goods for the west but for its own consumption as well, fuelled by the need to provide basic infrastructure for its population, and the need to get things ready for the Peking Olympics.
Diversification of asset classes is a good strategy to managed risks and the component of assets allocation will well depend on the individual's risk profile.
For me, I have elected to use value shares with high yield as a means of diversification from my momentum (growth shares), so that when it "bends" I still have the value shares to continue to provide me with the yield and capital growth, admittedly at a slower pace.
I notice some traders had elected to stay away from resource shares altogether, that includes some fund managers who invest on only shares that provide imputation credits.For a trader that ignore the resource sector all together is to ignore the fastest growing sector currently.
At times like this where many shares are thought to have been over value, it is more important to be selective (a bottom up approach).I have elected to be in the resources sector but admittedly I am extra cautious when I am in resources.
I cannot understand the bearish outlook of some traders year after year even when the market was commencing on the initial bull run.In 2001 and 2002, the market was so oversold that I thought opportunities like that did not come too often and accordingly I put my home on the mortgage and have the funds fully invested.
I chose the building material sector as the leading sector to get us out of the doldrums, my reasoning being the low interest rate and the first home grant from the government.It look as if the party was over, and along came the expansion of infrastructure and industrial and commercial building which help to sustain the building material sector.
My next selection was the funds management sector as I believe that a strong equity market will help the funds management and insurance sector along.Many of the banks are also in funds management, so they haven't miss out at all.
The next sector to pick up is the resources/energy fueled by the demand from China.
Which sector will come after the resources sector? I believe the consumer discretionary will follow, being sold down badly recently and being cyclical, their turn may come.In this sector I will look for companies that will continue to grow through laying out new stores or through acquisition.So a matured company is less likely to outperform.
So no matter how the market is faring there is always some sectors that may move contrary to the general trend. The trick is to pick the sector which is the next to move.Having said that, it is always easier to trade with the general trend.

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peterloh

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Tuesday, February 07, 2006 - 11:59 am:

The "poisons" of the stock market has some similarity with Budha's teaching.

We have "ignorance", the first pill of poison, "greed and fear" the second, and "aversion to risk" the third.

In Budha's teaching, we also have "ignorance" as the first poison pill,"aversion" as the third. In the second poison pill of Budha's teaching, there is "pride and jealousy" instead.

peterloh

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Wednesday, February 08, 2006 - 12:18 pm:

Volatility means opportunity or stay out of market all together. From entrepreneurs point of view it means business both ends, a time for short selling for those that are out to make a quick dollar. For the long term investors it is also an opportunity to get into a share they would have missed out on.
Lets not forget the broad trend, the general trend which is still up, whilst the secondary trend is down/a retracement.Whatever it is, it is always important to have a plan.For superannuation Fund Managers, it also means they can also get their shares at a more reasonable price then would normally have if there is no retracement.

peterloh

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Wednesday, February 08, 2006 - 01:10 pm:

RBA - interest rate is out, there is no increase in the interest rate.Cash base rate remains at 5.5%.

Growth forecast for the world in 2006 is about 3.3% whilst inflation rate is 2.6%.Forecast for growth in Australia is about 3.2% whilst the inflation rate is 2.9% which is below the 3% rate.

Growth forecast in China is 8.7% which when included with the G 7 drives the world growth up from a low of 3%. Inflation in China is forecast at 2.1% which is impressive considering their rate of growth.

Unemployment in Australia has been the lowest in 30 years and the current deficit balance of trade is expected to narrow because of our increase export in resources.

Our increase in share value is accompanied by an increase in the earnings and the improved balance sheet one of the reasons for our acceptable PE ratio of 15 or lower.

A year of negative growth may come in the future, I think it won't be the year 2006.

peterloh

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Wednesday, February 08, 2006 - 02:28 pm:

SHORT SELLING - Quick and easy money can be made from it.

The only thing is, in a general trend that is bullish, one ultimately has to cover. If it is against a good share, long term investors use it as an opportunity to buy more. Also a trader may change from a short seller to a long term trader for the same share, there upon putting a squeeze on the share which will made a share climb up very quick in a very short time. It is important always to have a strategy in place and if you short good shares, watch out.Hedge funds has not perform well against the general fund managers in the last 2 years, I wonder the reason for it.

ingot54

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Wednesday, February 08, 2006 - 02:53 pm:

Thank you for this thread, Peter. Good comment.

Could I add a bit about Fundamentals and short-selling, that I read in Alan Hull's book, "Active Investing - A Complete Answer".

In Chapter 12, "The Downside", Hull recommends keeping 30% of your position short. Obviously, in a bull market, this will wipe out your gains, unless ...

... unless you select the worst stocks in the ASX 200, in the worst sector.

What he advocates is having the position margined at 50%, so that your 30% of your trading capital equates to a 60% trading position. Does that make sense?

The reason he recommends this, is that:

1) Investing short in the worst stocks (declining, or counter trend of the ASX 200), should have you poised for events such as we have seen today. You will be making money.

2) If you wake up to a major correction, such as we see today, your portfolio will be protected to some extent by the profits on the short position.

Maintaining this short position at all times, should not cost you a premium, if invested in the sector/stock in decline.

And this stock, which is already being sold down, should suffer much more (ie: get sold off harder) than the general market, because it is already carrying negative sentiment.

I like Alan Hull's method - to me it really IS the complete answer. He teaches how to select the strongest trending stocks, for good, sharp, long-term gains, and the short ones, as I have just explained.

I notice from previous discussions with you, that you are an Integrated Analysis fan, with a strong emphasis on Theme trading. I remember too, that you enjoy trading on limited margin.

What is your feeling about Hull's method for being prepared for the corrections, as insurance for your portfolio?

Given the volatility coming into the trend of the S&P ASX 200, I have a suspicion that the clever money left the building before Christmas, and some of the moves we now see are happening in reduced volume environments, thus rendering their credibility a bit suspect, in some cases.

Keep Smiling

Trading style :CFD's predominantly. Looking for ways to enter CFD trading over long term.

ingot54

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Wednesday, February 08, 2006 - 03:02 pm:

Peter -

One further comment on your assertion that :

China is currently going through an industrial revolution which was experienced by the United States and Europe many years ago.The GDP of China may decline a couple of percentage point but will not grind to a sudden halt.We have not heard the end of the resource and energy story yet and it is here to stay for some time.China's demand for resources is not merely for the production of consumer goods for the west but for its own consumption as well, fuelled by the need to provide basic infrastructure for its population, and the need to get things ready for the Peking Olympics.

If there is economic decline in the West, this will affect China's sales to the West, of consumables, having a flow-on effect on their demand for raw materials.

This might follow, imho, that :

China will reduce its demand for our raw materials/resources, and ...

It is in China's best interests to ensure that Western economies stay buoyant. ie They do not have any ulterior motive to see the collapse of the USA. The greater the decline in the $US, the more gets wiped off Chinese surplus of trade figures. Is this correct?

Obvious I know nothing of micro/macro economics - I am always working on balancing my domestic budget!

Keep Smiling

Trading style :CFD's predominantly. Looking for ways to enter CFD trading over long term.

peterloh

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Wednesday, February 08, 2006 - 04:21 pm:

Ivan,

Learning never ever ends.Fortunately for me, the share market is a passion for me, as I eat sleep and breathe it.
I admit I have so much to learn, that when I walk ahead I only maintain my progress.When I stand still I fall behind.If I run I just manage to keep up with the pace. Currently I am only walking, so that I don't fall too far behind.

Yes, I have heard of this Alan Hull's method.Tony M was going to show me his system.As I have been travelling and moving office I have not caught up with Tony yet. I must read up on Alan Hull and his system.From what I heard from Tony and now from you, he must be very good.I must really make an effort to learn more about him and his system.From what you describe, it is a form of hedging. I am amazed there is no cost involved in this hedging method.I have to examine it closer.

Ivan, the world is very dependent on each other.I could be wrong, China is such an economic power that it can go on its own like the US before, because of its big market base. However I do not think China is doing that or elects to do that, it is better to have the world as a market than its own domestic market.It is in China's interest that the world does well.

It is better for the world to be buoyant so that the cake remains large, large enough for every one.Outside China, the US has the biggest forecast of growth 3.4%.The other main item is inflation which is less than 3% for for the G7. Only New Zealand has a forecast inflation rate of 3.1% for 2006.

If there is a threat, I can see 3 main items. They are the oil price, US current deficit and the China effect.If the oil price runs away, US current deficit becomes out of control and China drastically drop its growth rate. The terrorist factor which has such an effect previously, which I think has now been factor into the share prices.

Best Wishes

peterloh

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Thursday, February 09, 2006 - 12:46 am:

All hedging has a premium, the difference in price one has to pay to cover the shorts is the premium that we have to pay in a rising market to protect part of our profit in the event of a market correction.
My protection against a sharp ,correction is to buy the shares at the initial stage of stage 2 as in Weinstein.Unless the market has totally collapse, my strategy of long term investment using integrated analysis will help me through.Together with diversification across asset classes and low correlation amongst the sectors that I put my hard earn money in, I manage to strategically manage my risk.

tony_m

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