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

Is this a time to buy equities?

Has the Australian market reached an apparent bottom and is this the time to buy? The bull market in the United States remains intact at a time when the Australian market has been weak over past months. There is a lot of cash sitting on the sidelines and low interest rates make equities one of the few attractive investments. When an investor is trying to decide whether to enter the market emotion is always a factor and fundamental analysis often provides little help but technical analysis can be very useful.   Consider the following charts of the ASX200.

The weekly chart of the ASX200 below shows that the down trend is still intact and the 10/30eMA crossover contributes to a very bearish chart. There is support at the 5400 level going back nearly 10 years suggesting a possible bottom but the RSI remains negative.   Technically the weekly… Continue reading

Is confidence in this market justified?

Despite a weak Australian equity market most commentators remain very positive for a continuing bull market. But is this justified? Buoyant markets and world recovery is really dependent on the US economy and despite a weak first quarter, most of the economic news coming out of the USA is positive – but elsewhere there is uncertainty. The fall in oil and other commodity prices has been very positive for consuming nations. It is equivalent to a tax cut because it supports consumer demand. As a result, fears of continuing deflation problems in Europe have eased with both headline and core inflation now positive.

The bank of Japan has created uncertainty with its massive quantitative easing program which has stimulated the Japanese economy (although GDP growth and inflation growth remain very weak). The very much weakened Yen (at about 126 to the USD), has had the effect of exporting deflation… Continue reading

How effective is value investing

Value investing came into prominence with the publicised outperformance of investors such as Warren Buffet. The idea behind value investing is to buy only those stocks which have good fundamentals when they are trading at less than their intrinsic value. But how effective is value investing for the average investor?

I have become sceptical about the value investing approach after a recent experience with a major fund manager who is a value investor. My investment was an individually managed account which over a two year period underperformed the index and significantly underperformed my other equity investments. In May of 2014 I started to record data on a weekly basis comparing the ASX200 with my investment approach, the funds under management and a value investing approach. In comparing all three portfolios with the index, each had an equal amount of capital invested in a portfolio of 10 stocks.

The value investing… Continue reading

The dangers of investing in high dividend shares

The recent RBA rate cut to 2.5% has put pressure on investors, particularly retirees and SMSF trustees. The yield from investing in term deposits is now very poor with the after inflation return now less than 2%. As a result most retirees are looking for an alternative but because they are unaware of alternative investments such as corporate bonds (which still return as much as 7% for highly rated senior debt), the share market remains the logical option.

With advisors and brokers promoting the high yields from shares, many investors are entering the share market and buying high yielding stocks without regard to the risks. While some of the conservative blue chip stocks which are core holdings in most investment portfolios are returning high yields, these are not without risk and this is not a good time for new investors to enter the market which is now overvalued. Notoriously the… Continue reading

Fleetwood and fundamental analysis

Fleetwood (FWD) has been a successful company over a long period. Its business is the manufacture of caravans/mobile homes and manufactured accommodation. This latter part of its business means that it has a strong association with the mining services sector which has been savaged by the market over the past few months.

Fundamentalists have noted the value of this stock over the past year and as of mid June FWD shows a 22% yield, and its price is at a 46% discount to its IV. With a ROE of 21% which has now fallen from a long-term ROE of 33%.

I recall attending a meeting in November of last year where a Team Invest representative was talking about value investing and gave FWD as an example of stock which their group was then accumulating. The stated approach was that they would continue to accumulate FWD as the price continued to… Continue reading

Apple Inc. (AAPL) – its share price fall was a high probability

While not an investor in American stocks, I watched with interest the fall of Apple share price from its high of about $700 down to about $400, a fall of about 42% in six months. As a technical analyst I was curious to see in retrospect if on technical grounds there was any indication in October 2013 of the huge potential fall that was about to occur in the share price of Apple Inc.

Apple a hugely successful company with a very large cash reserve is now under pressure in a highly competitive market. Given the fundamentals of Apple a dramatic fall in price was not expected. The following weekly chart shows that by using the oscillator RSI, the fall in price of Apple shares was a high probability in early October and this was the time for investors to sell shares in Apple.
The RSI divergence signal was very… Continue reading

Fundamental analysis alone does not always work!

As an investor who uses both fundamental analysis and technical analysis, I find that there are sometimes situations where both techniques can fail if they are used in isolation.

The following is one such example where fundamental analysis failed to provide information to the buyer, of an impending fall in share price. Consider the stock NRW holdings. In late February 2013 NRW Holdings was trading at $2.20 and had the following fundamentals. It had a return on equity of 20%, a rising plane of earnings and dividend payments, a very low debt to equity ratio and a yield of 12%. So on fundamentals NRW was very attractive. But one month later the share price of NRW was $1.20, so the investor who bought this stock in mid March based only on the fundamentals faced a substantial loss of about 40%.

The daily chart of NRW holdings is shown below. At… Continue reading

Human emotion is the biggest enemy of the investor.

Human emotion is the biggest enemy of the investor.  I have been very bearish about this market for some time and this poses the risk of missing the next bull market and I need to constantly re-examine my attitudes to the market.   So I am always aware of the problems of psychology which can cause me to miss a profitable rally.

It is crazy to invest on the basis of a gut feeling or a hunch.  Currently we are in either a bull market or a bear market correction depending on your view.   But either way there is little doubt that this is a market that the investor needs exposure to simply because of the increasingly low returns from cash and fixed interest:  but you have to do your homework.  My approach is as follows.  There are… 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

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