Monthly Archives: January 2013

How to buy stocks in a bull market

Once a strong rally or bull market gets underway, nearly all stocks rise, often very rapidly.  For an investor who comes late to the bull market, stocks have already made significant gains and are starting to look expensive.  So how does an investor buy into a bull market?  The following is my approach.

I select stocks based on fundamental parameters.  I always look for stocks having a high and preferably rising ROE, a strong and increasing earnings per share over at least a 5 year period, an increasing dividend per share and a low,( preferably zero) debt to equity ratio. This approach provides a watch list of perhaps 12 quality stocks.  In a bull market there is the temptation to simply buy the stock at market price but patience is now required.   I now apply technical analysis and only ever buy stocks which… Continue reading

There are opportunities in small stocks

The equities market is now in full flight driven by low interest rates and quantitative easing.  The performance of the market in January has been very positive, with the All Ordinaries rising by about three per cent.  But over the past six months, while the All Ordinaries have risen by about 21%, the Small Ordinaries index has risen by only 10%.

It is clear that investors are moving out of cash or fixed interest into the equities market and this move probably has a long way to go.  But this move to equities has been in the big stocks such as Telstra and Commonwealth Bank, stocks which pay a high fully franked dividend and are virtually de facto bonds.  So investors in looking for high yields seem to have ignored the opportunities that exist in a small and midcap stocks.

Take for example the 10 stocks… Continue reading

Equities or fixed interest?

There is little doubt that equities are the place to be at the moment. This market is being driven by liquidity, low interest rates and complacency provoked by the illusion that the U.S. fiscal cliff situation has been solved.

Retirees in particular will be driven to the equities market as they find that rolling over their term deposits will provide a depressingly smaller income.

But how long will this bull market run and how far can it go.

The how long is probably the end of March when the next public display of congregational dysfunctionality we’ll be provoked by the debt ceiling issue.

The how far is possibly the 5000 resistance level on the ASX 200. Technically the monthly chart of the Dow Jones index below  with the RSI divergence signal provides the warning.

Dow 13

This is the time to be in equities but it is not a time for… Continue reading

Individual wealth and the investment industry

Recent years have seen the development of a huge professional investment and wealth management industry in Australia.  This is an industry which has with few exceptions been a miserable failure for the small investor.  The extent of the problem is illustrated by the following table which shows the annual return over five years for the top retail Australian managed funds by size.  These data are taken from the August issue of Money magazine. Big funds

The average annual loss for these five funds every year for five years was 3.03%.  But given an average inflation rate for this period of close to three per cent, these funds have destroyed about 6% of their client’s assets every year over the past five years.

The average investor is naive about the finance and investment management industry.  There is an extraordinary belief in the competence… Continue reading

Where are all the contrarians?

There is a consensus among investors and market commentators that this is the year of a bull market.  And there are few in disagreement.  One must ask where are the contrarians?  It always concerns me when the mob is stampeding in one direction.

There is little doubt that over the past year most markets have been very buoyant and in many cases these markets have reached their highest points for five years.  It is interesting that markets now also exhibit low volatility and low volumes.  It is worth considering some of the broad market indicators to see if there is any confirmation for market bull market conditions.

The chart below shows the Baltic Dry Index which is a very good indicator for the level of world trade.  The BDI index is currently is as low as it has been for five years and this… Continue reading

You can time the market!

The popular mantra of the fund manager is that the equities market cannot be timed.  This is part of a marketing strategy by the fund managers to convince the average investor that investing in equities is very complex and must be left to the professionals.  It’s all about promoting managed funds, protecting inflow of capital, charging high fees and nothing about investment competence.

So can the market by timed?    The answer from experienced technical analysts is emphatically yes and the monthly chart of the German index the DAX (below) is an example of this.

dax In this chart the RSI indicator is applied.  The RSI divergence provides a strong indication that the trend will reverse.  In this situation in late 2007 there was a strong RSI divergence.  When this divergence is accompanied by an RSI trend line, a breakout from the trend… Continue reading

Chasing yield in the current market

As interest rates continue to fall investors are chasing yield and term deposits become unattractive compared to equities.  The equity market now offers many stocks which are offering a high fully franked yield.  Many of these stocks including the banks have had a strong move over past months.  There is some doubt that many of these stocks, particularly the banks will be able to maintain earnings over the next year and continue to pay dividends at the same rate.

Seems to me that there are many stocks which have been overlooked.  These include the small and mid-cap stocks which have very high ROE, no debt, have paid consistent dividends over many years and continue to increase earnings.  While the small stocks are more volatile in a market downturn they do offer real opportunities for the experienced investor who is patient and wants to invest in… Continue reading

Headwinds facing the world markets in 2013

In another blog ( my technical analysis suggested a significant reversal for the U.S. market in early 2013.  Of course if there is a correction in the U.S. market this will create significant problems for other major world markets.  So it is worth trying to identify those significant headwinds which could impact upon world markets in the medium term.

The outlook for growth in the European Union is poor at best.  Unemployment across the EZ exceeds 12% and is unlikely to improve in the medium term.  The outlook for GDP growth is poor despite historically low interest rates and quantitative easing.  At least in the short-term deflation is likely to occur and with such high unemployment it is unlikely that we will see inflation at least during 2013 despite the huge amounts of quantitative easing.  Within the EU the ECB decision to… Continue reading

A technical appraisal of the market January 2013.

The share market at the start of 2013 is very bullish. While the fundamentals in the United States and China give cause for optimism, do they really have the potential to support a bull market? A strong bull market can only be driven by strong growth and in most markets and particularly in the United States fore casted GDP growth is too low to support a bull market. The current “bull” market is being supported by high liquidity and very low interest rates and not by growth. In my view this is not sustainable.

While the charts of the indices for major markets, including Europe and China are quite positive, by contrast the charts of the U.S. indices are very negative. Take for example the monthly chart of the Dow Jones index below.
Dow 13
In this chart the RSI analysis provides a comparison between the current market and the period in… Continue reading

Bull market or continuing secular bear market for 2013?

In Australia we are now five years into a secular bear market. The question now  is whether we are now in a bull market phase or simply seeing a bear market  correction? Using Elliot wave analysis, the interpretation is that we are only  part way through this secular bear market. Certainly when one looks at the chart of the ASX 200, there is very strong resistance at about 5000 and this would  suggest that this current “bull market” move might run out of steam by about the  5000 point.

There is currently widespread belief that we are in a new  bull market. In fact there is too much agreement about this bull market. We need  to question whether this is really a bull market which is being driven by a  return to productivity or whether is simply a market which is… Continue reading

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