Archive through May 12, 2008

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rdumas

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Post Number: 1391
Registered: 11-2006

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Thursday, May 08, 2008 - 08:23 am:

Hi Coyotte,

That's a fair comment to make. It comes down to personal preference in the end. Perhaps a brief history of where I come from and have ended up may give you some further insight.

I could revert back to my old short term trading days where I did just what you described in our post. During my day trading days it was fun being challenged by the market on a minute by minute basis. This also applied to the times when I would do the same thing playing stocks for days which sometimes stretched into weeks. It was a very busy time and as you say there are opportunities by the thousands if you want to play that particular game. They were my trading days where the last thing on my mind was fundamentals and all I had to do was to play the TA game with its myriads of systems and breakout plays, etc.

I have to admit that I didn't like the demand on my time or the paperwork trail that all those trades left me. Coupled with that was the fact that I was only playing with a relatively small percentage of my total capital because most of that was tied up in a superannuation fund being managed by others. When I got sick of being charged around 2% of my total superannuation fund capital regardless of whether the fund made me money or lost it I decided to take things into my own hands.

In the new environment that I found myself in where I was playing with my life savings I decided that I wanted to do things differently. When you suddenly find yourself with your total life savings in play knowing that the results of your investments determine whether you have a good lifestyle or that of a pauper, your attitude to how you invest can change significantly.

In my case because of my desire to retire early, my funds were border line and hence my first priority in my investment strategies was capital preservation. Based on the many people that have approached me privately in the same situation it appears to be a very common thread. This is so even for people that have 10 times the capital base that I have. Perhaps it is because of the age group that I belong to where our parents in the main were poor and we had to work hard to put together the life savings that we accumulated. I can't honestly tell you whether my approach would have been different if I had had an overabundance of funds. I'll let you know if I ever get there and act differently.

After making that initial capital preservation decision I next had to determine whether I wanted to be a short term trader or a longer term investor. Whilst I enjoyed the challenges of short term investing I did find it very time consuming and required a lot of book keeping for both my self and my accountant. I therefore gravitated towards a decision to become along term investor. Ideally it would have been of the 'buy and hold' variety.

This investment time frame could no longer rely on purely TA based methods because whilst stocks can spend relatively short periods of time defying their real world fundamentals due to purely sentiment reasons, the realities of their fundamentals always come out in the end. Fundamentals don't give you the day to day price changes but they do give you the longer term outlook for the stock. Fundamentals tell you whether the stock price is based purely on market sentiment or on sound economic realities.

My experience tells me that a stock with sound fundamentals has a much greater chance of performing well over a much longer time than one that has poor fundamentals. As my prefered time frame was to be long term it required me to bone up on the fundamentals side of things. Prior to that time I knew nothing about fundamentals.

Having said all of the above, I found that even though my intention was to become a long term investor regardless of the strength of any individual stock, market cycles would always ensure that my first priority of capital preservation could not be met. That is to say that having been in a stock which made significant gains, I did not want 7% ~ 12% market cycle corrections to take away from me those gains that I had earned. To me it seemed senseless to jeopardise my total capital funds to that sort of action so whilst I wanted to be a long term investor my natural capital preservation instincts forced me to adopt a much shorter time frame. As it happens I appear to have settled into an average time frame of about 6 months. Depending on the market cycles that time frame could shrink or swell.

Any way that is how I have arrived at my current investment time frame position.

I would also like to just briefly dispel any possible notions that I am a pure fundamentals based investor. I use fundamentals as an initial filter to determine whether a company has the financial strength to prosper into the future. That is the extent of what I use fundamentals for. Having determined that a company has that financial strength then all my attentions move to the TA side of things. I use TA to determine the optimal entry and exit points. I would spend more time on TA than FA but none the less FA is extremely important to me as an initial filter of stocks to buy.

Well that was rather long winded but I wanted to give you some idea why people chose to invest in different time frames. Of course we miss out on opportunities by not trading in different time frames. I have found for instance that being a medium term investor has given me large increases in share prices of stocks that I held which suddenly flew up because of some 'out of the blue' new development that could never have been picked up by a pure technical analyst using much shorter investment time frames. Each particular investment time frame has its own rewards and limitations. Investing with relatively large amounts of money keeps me out of the 'penny dreadfuls' also. Now there is no doubt heaps of opportunities that I am losing out on there as well but such is life. We chose our investment styles and time frames and live with the lost opportunities and enjoy the benefits that that particular investment strategy provides.

rdumas

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Post Number: 1392
Registered: 11-2006

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Thursday, May 08, 2008 - 09:19 am:

S&P500 is unable to break through strong resistance

The S&P500 last night was unable to break through an close above the strong resistance level of 1420 established on the 10th January 2008 (refer to blue line on chart).

I have added last nights action onto yesterdays chart to give an indication of the parameters in play. As can be seen from the chart the S&P500 had been travelling upwards in a channel since mid March. It will be interesting to see if it can bounce off the bottom of this channel (refer to red channel lines) or break through the bottom of it. On most occasions during the last 9 months the RSI has been unable to get to the over bought level (70). It had reached 64.3 yesterday.

ody

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Post Number: 2442
Registered: 10-2006

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Thursday, May 08, 2008 - 10:38 am:

SWAY, COYOTTE, RUDY

Sway, thanks for supplying that answer. I thought that it would be just that, so I shall very strongly bear your procedure in mind on any occasion when I comment on a stock you might be thinking about. That is why I said to you about HGI what I did, even though I would not say the same thing about it to myself: we are not proceeding in the same way, and it makes no point for me to assume that we are - it is YOUR goal that I need to have in mind. And rest assured, I understand it and know what you are talking about; I also know it can be made to work.

For my own - longer-term - approach I work in much the same way as Rudy, but it's not identical. I am, at least to an extent, more prepared to sit through a correction, though usually I then make some adjustments so as to decrease risk and to try and profit from the correction rather than lose. I am however MOVING towards selling more into cash ahead of corrections, and to an extent have already been doing that.

I do not find it difficult to buy in corrections, as distinct from bear markets, so locking in profits before the fall, and then buying after stocks are down but moving up again does in general work.

As I have been in the market (both directly and through managed funds) since 1983, and have personally built up a lot of our capital over this period while in the workforce, I am still not over-worried about corrections, even though since my retirement I have been more aggressive about tackling them. I have ALWAYS been concerned about bear markets - to start with 1987 - and to my mind with good reason.

While I was working as an employee it was really not easy to find the time to swap things around with great frequency, so automatically I tried to find investments that would not need constant tampering. For periods of years there were actually for one thing some very good funds that made that unnecessary, e.g. BT Pacific Basin, and First State Imputation. I was in the latter fund from almost the time of is commencement (when it was tiny) until I decided to go out something like ten years later (when it was enormous): it was a truly great investment while it lasted, and certainly taught me that it is not always necessary to keep on tinkering, or to avoid ALL managed funds.

However, I also from early on would quit investments very quickly if something looked like really going wrong with them (e.g. change of management, profit downgrades, significant economic changes). But I would often stay - and comfortably - in individual shares for years. For example I held the ever-lamented BRL Hardy, a fantastic wine stock, until the time it got taken over. I think that I had that for close to ten years, and the initial investment increased exponentially. There is much to be said for sticking to a good thing while you are on to it. As Rudy said: there are often pleasant surprises which no chart would predict. In many ways I think management is the key, provided that they are working in an environment that enables them to sell what they produce (goods OR services).

The most important things, to my mind, have been the following:

(1) You must try and build up wealth OVER TIME, whichever method you use. Aiming to get rick very quickly is for e.g. pop-stars or absolute whizzkids, but not for more ordinary investors.

(2) If you do that, and don't want to be constantly busy but are aiming for stocks (or funds) that you can in principle keep for some time (outside bear periods, at least), it is vital to buy QUALITY, which involves you in looking at things fundamentally, and I have never regretted doing that as my primary approach. It has meant that, for example, at the time of 9/11, when of course the market took a big dive, I was not in the least concerned, as I knew that what I owned would definitely recover. In the last analysis, stocks with really good fundamentals will usually do so, or at least until they strike some major hitch.

(3) Notwithstanding my looking for quality and for stocks that in principle I can keep for longer periods, I these days sell very quickly those that seem to me to go awry, while (as I have always done) I let the profits ride until I see good reasons for cashing them in. Prior to retirement, I already worked on this principle, but I found it harder to do it so effectively as I can do now, as (a) I could not check things all the time, and (b) I had to pay large amounts in tax when selling. My one truly major mistake was failure to sell an investment for tax reasons and thus losing a very large amount in profit (though not in capital). Since that time (and it was not long before retirement, either), I swore that THAT would never happen again, and it hasn't, and I don't think will.

But note: this is a method of working that has worked for me, personally, and I am well aware there are perfectly viable alternatives.

deanrosario

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Post Number: 1399
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Thursday, May 08, 2008 - 11:21 am:

Quite an amazing reversal on the XJO after the opening of all stocks at 1010 a.m.

There has been virtually no selling pressure as evidenced by the XJO intraday 5-minute chart.

Unemployment figures for April 2008 will be released at 1130 a.m. ... and an interesting day could get even more interesting.

"Never commit yourself to anything you can't walk away from in 30 seconds." Neil McCauley (played by Robert de Niro) in 'Heat'.

"Hope is a dangerous thing. Hope can drive a man insane." Ellis Boyd "Red" Redding, played by Morgan Freeman, in 'The Shawshank Redemption'.

deanrosario

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Post Number: 1400
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Thursday, May 08, 2008 - 11:38 am:

Labour Force figures April 2008 (released 1130 a.m.)

Ref: abs.gov.au

SEASONALLY ADJUSTED ESTIMATE (MONTHLY CHANGE)

EMPLOYMENT

Increased by 25,400 to 10,712,900.
- Full-time employment increased by 19,000 to 7,658,000
- part-time employment increased by 6,300 to 3,054,900.

UNEMPLOYMENT

Increased by 16,900 to 469,800.
- The number of persons looking for full-time work increased by 17,300 to 330,500
- number of persons looking for part-time work decreased by 400 to 139,300.

UNEMPLOYMENT RATE

Increased by 0.1 percentage point to 4.2%.
- male unemployment rate increased to 4.0%
- female unemployment rate increased to 4.5%.

PARTICIPATION RATE

Increased to 65.4%

End of abs data.

Dean's assessment:
Increase in the number of employed persons indicates the Aussie economy is still strong;

Increase in the number of unemployed persons may help capacity constraints and help to curb rising inflation.

(Message edited by deanrosario on May 08, 2008)

rdumas

Member

Post Number: 1393
Registered: 11-2006

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Votes: 0


Thursday, May 08, 2008 - 11:44 am:

Hi Sway,

Continuing on from yesterdays look at the stocks you mentioned in your post.

ZFX

Looking at the chart I can see good reasons for a short term trader to be interested in this set up. ZFX has recently broken out of a wedge pattern and the 4 and 10 week EMAs have started to flatten promising an up turn. It certainly looks like it is getting ready to fire. They are the positives of the stock.

As for the negatives that a medium to long term investor would look at we have a number of them. Firstly the 30 week EMA is still trending down hence it is in a Weinstein stage 4 phase and the stock is still trading below this EMA which conflicts with my safety first rules. The fundamentals are also not promising. Both the ROA and ROE have dropped dramatically in the last 12 months. The earnings for June 2008 anticipate a drop in earnings of 65.2% and in June 2009 the earnings forecast is for a further drop of 26%. Should these earnings be accurate this stock is in for some problems ahead.

BKN

This is a stock that I have made good money out of in the past and we tend to be drawn to those type of stocks (a natural human trait). Again from a short term traders perspective the stock price has found a bottom and has been trending upwards since mid March much in line with what the market has been doing in fact. The 4 week EMA has crossed the 10 week EMA and the stock is trading close to the 30 week EMA. In getting to the recent high its RSI reached around 80 and it has now dipped to around 66.6 so some up move is possible but none the less it is closer to being over bought than neutral.

So from a TA perspective it has less going for it than ZFX in my view as I feel that the probability of the stock price flattening out is probably slightly ahead of a significant more upwards.

From an FA perspective Bradken's future earnings look good but Stock Doctor has its financial health rated as 'Marginal' due to 'weakness across its balance sheet' giving it unacceptable risk elements.

rdumas

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Post Number: 1394
Registered: 11-2006

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Votes: 0


Thursday, May 08, 2008 - 04:53 pm:

The Australian market bucked the lead that came out of the US last night.

In case you were wondering why here is possibly part of the answer. The extract is a Reuters report about today's action take from the Business Spectator site.

Local stocks turn positive

Reuters

Australian shares have erased early losses to rise 0.7 per cent after reassuring comments from two big Australian banks sparked a recovery in the financial sector, offsetting falls in the miners on weaker metals prices.

Commonwealth Bank of Australia Ltd and Westpac Banking Corp said at an investor presentation that they were well-placed to ride out the global credit squeeze and that they have no plans to raise additional capital.

The benchmark S&P/ASX 200 index rose 37.4 points to 5,705.8 by 1338 AEST, after falling as much as 1.4 per cent earlier in the session

The news coming out of two of our biggest banks was what investors wanted to hear after the banking sector was trashed in Austraila to the same degree as the basket case banks in the US.

As can be seen by the chart below of the Financial Sector excl. LPTs the sector was taken down around 39.4% in line with the banking sector in the US. The 'tarring with the same brush' syndrome was well and truly in play in this trashing of our banking sector in my opinion.

The index is now 27.7% down from its highs at the current time having recovered about 12%. Should the index break through the overhead resistance indicated by the blue line then it will once again be in a primary uptrend. There is no doubt that this sector does have a lot of head winds to face in the coming 12 months with high interest rates and decreasing consumer demand but banks have traditionally been a safe haven for investors in the past and I suspect that this will quickly become the case in the future.

It will be interesting to see if our market has started to finally decouple from the US market a fraction due to our better economic circumstances. I will be watching for that with great interest.

ody

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Post Number: 2443
Registered: 10-2006

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Thursday, May 08, 2008 - 05:18 pm:

RUDY: BANKS

That's very interesting comment. Traditionally, Australian investors love investing in banks almost as much as in houses, and the absence of security in that area has been a real hancicap for the market as far as "mass participation" is concerned. If CBA and WBC are believed - and they are the banks that would look like having the best credibility (in all senses) - this could well prove a turning point for the mums and dads and the big funds. People would in a way like to believe (and they partly do) that the big resources stocks have now taken over the banks' conventional role, but matters would be much easier, for investors who want to prepare something more than onesided portfolios, if they could include banks: that prospect makes them feel comfy and secure. (I am myself an example, I admit.)

So if CBA and WBC are not misleading us, then this could be very good news. As for WBC, not only is that the "cleanest" bank, but its manager inspires enormous confidence. All this is, of course, partly reflected in the price.

My sense of the Australian market is that it will be difficult to stage a true recovery without the banks, and that vice versa if the attitude to them REALLY changes the market could well "fall into line" far more smoothly than it has done to date.

As you say: one is looking for - hopefully justified - decoupling from the US, PARTICULARLY in the financials.

sway

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Thursday, May 08, 2008 - 06:07 pm:

My take on "Decoupling"

Here are some measures of the mysterious "decoupling" from the US market that gets discussed a lot lately. I have looked at the last 4 years and put some linear regression lines on to show the basic trends.

First the XJO in comparison to the S&P500:

xjo

This is saying that XJO was steadily advancing at a faster rate than the S&P500 until mid November last year, when it "decoupled" and started to lose ground.

Now the Financials ex property XXJ:

XXJ

A similar story, although this sector started "decoupling" back in April 2006, then really said goodbye in November 2007

Now the FTSE100:

FTSE

Although it looks dramatic, if you look at the scale compared with the 2 Aussie indices, you can see the Poms haven't "decoupled" nearly as much. The FTSE has tracked the US market fairly closely. (Note to Colin Twiggs: we need manual scaling of the vertical axis please)

Finally the XMJ MAterials Sector:

xmj

It has remained "coupled" and continues to march ahead of the US market.

In conclusion, since the current downturn started, the Aussie market as a whole has been punished (ie decoupled) much worse than the US and UK markets. The exception is the materials sector which still looks bulletproof. When looking at last month of the XJO and XXJ, it might be more accurate to say that we could finally be "re-coupling" relative to the US market.

We might even be starting to restore the status quo.

Cheers
Sway

This is not a recommendation or advice. As they say .... DYOR.

ody

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Thursday, May 08, 2008 - 06:30 pm:

SWAY: US INFLUENCE

Those are interesting charts. The way I see the "coupling/decoupling" matter, Australians (and perhaps others) have associated the resources with China, and in that respect have - as many hoped would happen - managed to stay "decoupled" from the US.

As you rightly point out, it is a different matter in other categories. The most amazing performance of a negative kind is that of the Australian financials, which have really "copped" it. My guess is that Australians originally almost completely ignored the subprime problems (except for the brief 15% fall in August), but later OVER-COMMPENSATED once the crisis reached our shores, and people started "outdoing" the US. It WAS the US, however, that sparked this off, and in that sense the performance of the financial sector (on the share market) is "coupled" to theirs. However, what is now needed is not that we thoughtlessly follow the US in just any direction, but that we take the measure of our own situation. If that happens, then, if the optimists are to be believed, Australian financials will be found to be in much better shape than their big fall in price would suggest. Obviously prices have improved somewhat already, but the chances are, I would guess, that - perhaps especially because Australians are so fond of banks - they have probably clobbered them quite unduly, thinking (wrongly) that our banks would face write-downs on an American scale, proportionately.

sway

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Post Number: 285
Registered: 12-2005

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Thursday, May 08, 2008 - 07:23 pm:

Ody, I was worried that my explanation might be too obscure but you have cottoned right on.

Following on from your remarks about the Australian banks being unreasonably sold down, it could be that the financial sector will greatly outperform the market over the next few months. The XXJ has a lot of catching up to do. If it does, it will be a significant upward force on the Ausssie market.

Cheers
Sway

This is not a recommendation or advice. As they say .... DYOR.

eblode

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Thursday, May 08, 2008 - 09:49 pm: