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Index funds could be an expensive mistake

The past couple of years have been very difficult for investors. It has also been a tough time for the professionals, with most managed funds and LICs showing mediocre results and a large number with negative returns.

It is not surprising that many investors have become disillusioned and there has been a huge inflow of cash into index funds. Many investors seem to be accepting the advice of Warren Buffet who is an advocate of index funds for the small investor when he says: “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.” (2016)

But how sound is this advice in 2017 and how good is index investing? Consider the following monthly chart of the ASX200.Index investing

If you had invested in an ASX200… Continue reading

The Coppock applied to the current market

Consider the chart of the All Ords Index. In about July of 2016 a positive Coppock signal was given (shown below by the green arrow). This indicated that investors should be starting to buy stocks. It is worth looking at charts of the major stocks to note that most stocks started strong positive moves at about that time.

What perhaps makes the July Coppock signal more persuasive is that a Coppock entry signal was evident at about the same time during 2016 for almost every major world index. One of the very few exceptions was the Nasdaq index where because of the very bullish nature of that index, the Coppock failed to move below the zero line.

The recent widespread occurrence of the Coppock signal might suggest that there is a high probability that all world markets will be positive this year. But that is a matter of probability and… Continue reading

The Coppock indicator and the Australian market.

The Coppock indicator is a long-term momentum oscillator based on rate of change. It was developed to identify long-term investment opportunities in the S&P 500 and Dow Industrials indices. The signal is very simple. A buying opportunity is identified when the Coppock indicator is negative and becomes more positive (but crossing the zero line is not an entry signal).

From looking at many charts, it is evident that there is little difference in subsequent movement of the index whether there is a deep or a very shallow Coppock trough. The Coppock is a lagging indicator and the signal is very general and often several months late. A more precise entry signal is provided by a monthly MACD crossover but this signal is usually later still than the Coppock.How useful is the Coppock signal? The monthly chart of the All Ords Index below, shows that there were nine Coppock entry… Continue reading

Market direction in 2017?

Even though the equity market is looking expensive most commentators are very positive about prospects for 2017. There are however several things that could change the mood of this market.

The following are some economic/political risks for 2017. The questions to ask are:

  • will the failure of Italian banks cause the next economic crisis?
  • can China solve its more serious problems and continue to grow?
  • how will further crises in the Middle East affect world growth and stability?
  • can the European Union handle political instability and more refugees?
  • what impact will a Trump presidency have on world stability and growth?

The above are the critical questions to ask if we try to understand the trend of equity markets in 2017. Of the five points, perhaps the critical one is the unknown Trump factor. Trump remains an enigma with policies aimed at improving job prospects and profitability in the United States… Continue reading

Using both Fundamental Analysis and Technical Analysis

Fundamental analysis and technical analysis are the two valuable tools available to the investor. Technical analysis is now well established as a technique and yet there remains a bias against it despite ample evidence for its value as an investment tool. In my experience to get the best result as an investor needs to take advantage of both fundamental analysis and technical analysis.

An important application of technical analysis is its use in timing the market. There are two components to timing the market.

  • To control market risk. Which simply means that an investor avoids buying stocks in a bear market or during a market correction.
  • To control specific risk. Specific risk refers to the risk associated with a specific stock. If an investor uses technical analysis to avoid buying stocks which are in a downtrend, then specific risk is significantly reduced.

Perhaps one reason that investors do not use… Continue reading

Expect the Australian dollar to weaken further

Investors who have interests in offshore securities or travel overseas need to be aware of trends in the Australian dollar (AUD). The value of the AUD is affected by a variety of factors.  The more important of these are interest rates, commodity prices, the strength of the United States dollar (USD) and the Chinese economy. But other factors include national growth numbers, consumer and business confidence, labour and housing markets, the equity and bond markets and inflation figures, all of which contribute to the valuation of the AUD.

It can be seen from the monthly chart of the AUD below, that the AUD has fallen significantly from its high of $1.10 against the USD. At its current value of 71 cents it is now at about its long-term average so there is considerable room for further falls when one considers that most of the factors that affect the value… Continue reading

Why is investing so difficult?

Many people find that after some failed attempts at investing they make the decision to give up and turn their funds over to a professional investment manager. This is even though the performance of the professionals is poor, with more than 70% of fund managers underperforming their benchmark over a five-year period.

By contrast, the small investor has the advantage that he/she can move quickly, invest in small cap stocks which potentially provide much higher returns and can avoid being invested during a bear market. So potentially the small investors can do better than most professionals so why do so many small investors fail? There are three things that prevent the novice investor from succeeding

Lack of planning. Surveys show that about 70% of investor have no investment plan. The first essential is to have a plan which when implemented provides not only the roadmap but also the discipline… Continue reading

Elliot Wave or Coppock. A Bear or a bull?

As noted previously, some analysts would see the current Elliot Wave pattern as persuasive evidence for an ongoing Australian bear market.

The chart below shows the ASX200 over an 11-year period with the Elliot Wave A, B, C waves of the bear market labelled in red. Wave A started in November 2007 and Wave B started in March 2009. Wave C which started in March 2015 might be expected to run for some time and distance. The target for the C wave (the end of this bear market) from this chart is probably at least the 3150 level which was the low of the 2008 bear market.

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While the Elliot Wave projection for a bear market is one possible outcome, the Coppock indicator on the chart below shows a very different signal in about June 2016 which suggests a future bull market in Australian equities.

These two longer term… Continue reading

What investors want

The recent survey of 7100 investors in 22 countries by Natixis is of particular interest. It includes 300 Australian investors and provide a glimpse into investor behaviour and beliefs. It seems that most investors are very concerned and recognised the need to invest for retirement but they simply have no idea how to invest to get the returns that they will need.

Investors have unrealistic expectations of the equity markets and:

  • are looking for returns of about 9% over the inflation rate.
  • have little understanding of the issues of volatility
  • do not understand the relationship between risk and return
  • are unduly cautious and risk adverse
  • fifty-one percent of investors did not have financial goals
  • amazingly 63% of investors had no financial plan.

Most investors have little understanding of risk, return and volatility. About 60% of investors worldwide did not seem to understand the role of bonds and equities in asset… Continue reading

The Coppock indicator and current market risk

The Coppock indicator is very useful for finding the probable start of a new bull market and is used on the monthly charts of an index. Over the last 40 years the Coppock indictor has provided a high probability indication of the start of a bull market in Australian equities. An entry signal to a new bull market is given when the Coppock indicator is negative and then starts to rise. It is a lagging indicator, so lacks precision but nevertheless is very useful for investors.

coppock-16

From the above chart the Coppock gave an entry signal to a new “bull” market in Australian equities in about July of 2016. The question is whether this is a valid entry signal or one of the few false starts that Coppock has provided over the past 40 years.

When one looks at current world political and economic events, there is much uncertainty. World… Continue reading

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