Australian market

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

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

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

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.

ew

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

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

Market Top?

The equity market is now looking expensive but it could well continue to go higher. With interest rates continuing to fall, investors in desperation are looking to the equities market. And yet a lot of money is not committed and remains on the sidelines. Will this money now flow in and fuel an already overheated market? It does seem to be a risky time to commit new funds to the market at a time when the policies of central banks have pushed asset values to very high levels and world growth continues to slow.

There will be the tendency for some investors to think that they are missing out and try to chase this market. However, September, a time when there is a higher probability of a market correction is fast approaching and there are emerging issues which could provide the ingredients for a market panic.

With the world political… Continue reading

Caution needed with this “bull” market

The ASX200 index has now convincingly taken out resistance at 5427. From its low in mid-February of this year, there have been a series of higher highs and higher lows (see chart below), so this move no longer has the feel or appearance of a bear market rally and has the potential to continue. It is now becoming difficult to rationalise the market move over the past few weeks with my Elliot wave model of a continuing bear market! There has been some support from the financial sector and the gold sector has been particularly strong with increasing support from resources stocks many of which are showing interesting up-moves from based patterns.

xjo july

Despite these promising developments investors should be concerned about a number of world events which could potentially impact on the Australian market. These include the on-going effects of Brexit on the world economy, the alarming state of Italian… Continue reading

Elliot Wave and the ASX200 bear market

November 2007 was the start of a secular bear market in Australian equities. In Elliot Wave terms this was the start of a major A,B,C correction as shown in the chart of the ASX200 below. Elliot Wave analysis is useful in providing the investor with a longer term, broad perspective of the market. fib long term

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

The following chart of the ASX200 provides a more detailed analysis of wave C which… Continue reading

Sell in May and go away.

This adage is one of the oldest on Wall Street but it had its origins in the UK in the form of “Sell in May, go away, buy again on St. Leger Day”

St. Leger Day is the day on which the oldest and longest classic race of the UK racing season (the St. Leger Stakes) is run. This is traditionally on the second Saturday in September. According to Investopedia “the ‘Sell in May’ effect tends to be particularly strong in European countries and robust over time. Sample evidence, for instance, shows that in the UK the effect has been noticeable since 1694. Note that – since 1694!”

In Wall Street “Sell in May and go away” is based on strong historical data. There is persuasive evidence from the United States markets which show that the months of November to April offer significantly higher returns than the months of… Continue reading

The myth of searching for yield

With very low interest rates which are barely above the inflation rate, investors are looking for yield. Professional advice over the past year or so has been to buy the high yielding blue chips. Was that advice sound? Take for example the investor who took this advice and bought 10 blue chip stocks (including the banks, TLS, BHP, WPL, CSL and RHC, in January of 2015. The returns from this buy and hold, blue chip portfolio are shown by the blue line in the chart below with a loss of 16% for investors over this 15-month period.buy and hold

By comparison investors who had bought a managed portfolio of strongly trending growth stocks with a very high ROE in January 2015 would have performed much better. A performance of 10 such stocks in a managed portfolio is shown by the red line in the chart above and provides a 30% return for… Continue reading

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