Friday, December 23, 2011

Merry Christmas

For me, the whole Christmas season can be summed up in one word: Hope.  Most of us possess hopes for our family members and loved ones, hopes for ourselves, and even hopes for total strangers.  We hope that family members and loved ones will be spared major difficulty, and spared the struggles of poor health.  We hope our own lives will have meaning and success.  We hope the plight of those less fortunate than ourselves might be made easier, and that the oppressed will find the freedom of self determination.

The birth of Jesus raised many hopes, as well.  For centuries, the prophets foretold the coming of the one who would change our entire world.  At last, at his birth, could those hopes actually become reality?  Too quickly, the events of his life passed, and we were then left with the hope of his coming, again.  The world was changed, but not in the way that most would have expected, nor in the way many had hoped.

Christmas, for me, is always a reminder that hope is not something we have, but something we do.  By that I mean we would not be celebrating in the true spirit of Christmas if all we did was to sit around hoping for change.  Hope inspires courage.  We need to get involved, to do the things that bring hope and joy to others, and invite others to do the same.  That is what Jesus did, and that is just what so many others do.  I am never disappointed.  Every year during this season I hear stories like the disabled person raising $600,000.00 for charity, or little children who raise $6.00.  I see Salvation Army kettles jammed with cash.  I see families reconciled, at least for the moment, and people who go out of their way to help out total strangers.

While it is a holiday, it is the holiday we spend wanting to do things for other people.  It gives me hope that people are capable of doing the right things.  It gives me hope we can do anything by working together.   It gives me hope in a better tomorrow.  It always reminds me to do my part.  Personally, I also believe it is what Jesus, whose birthday we celebrate, would have hoped we would do.  May God bless all those who bring the gift of hope to others, through their acts of kindness, and through their acts of courage.

Merry Christmas!!

Tuesday, December 20, 2011

Giving and Health

Click Here To Play The Video
Not a whole lot new here, but it is something to think about - not just during the Christmas season, but the rest of the year, as well.  Remember, how much we give is less important than simply giving.  The video also points out we cannot feel good, and feel poorly at the same time.  A great attitude literally pays dividends in our daily lives as well as when it comes to investing.  

Tuesday, December 13, 2011

Santa Claus Rally

Click To Enlarge
The Story
Many people think charts are just lines drawn to make a picture.  Ask any nurse, or doctor and they will tell you there is a story behind every chart.  The reason we graph the data is to illustrate trends and to highlight relationships.  Few of us have the ability to look at the data and visualize the relationships in our head.  Yet, it is not the trends and relationships themselves, which we are looking for, but the story they tell us.

Golden Year
The chart above is a great example.  It is a chart of the price of gold during the last year, or so.  Each price candle represents one week's worth of price data.  The lines along the bottom of the chart represent the volume of transactions for each corresponding week.  It is immediately obvious the price of gold has done very well over the past year, as it starts from the bottom left and rises to the upper right. Then, the price drops considerably in September as it begins to form an interesting triangle pattern.

The story behind a triangle, such as this, applies very much to the type of market we currently find ourselves in.  Triangles develop in times of uncertainty.  The drop in September came as problems in Europe became more of a worry than the inflation story which had dominated up to that point.  Then, when it seemed the deleveraging was overdone, it was time to accumulate gold, again.  One day, Europe was going to collapse, and the next it wasn't.  One day, the Chinese economy was going to crash, and the next day it wasn't.  One day we were going to see the U.S. market decouple from the world economy, and the next it wasn't.  Whatever the causes, there has been no shortage of uncertainty of late.

Going Down?
Normally at this time, we see a rally going into the end of the year, hence the name Santa Claus rally.  It may still be too early to tell, but if next week starts below the bottom trend line of the triangle I drew on the chart above, I would say we can forget about any rally, this year.  This chart is a chart of gold prices, but this pattern is also showing up in the charts of many of the large equity markets.  One interesting thing about this chart is we can use this pattern of uncertainty to predict how much affect it will have.  I drew a blue line at the widest point.  I then took a line of the same length and extended it down from the apex of the triangle.  What that tells us is, if the price of gold continues to move down past the bottom line of the triangle, we are probably headed back to the low for the year - a point which is about 20 percent lower.

Historical Rhymes
Think of the price of gold going higher until the period of greatest uncertainty which caused those who were feeling too over leveraged (think hedge funds, and fund managers) to start selling gold to raise cash, only to start accumulating gold, again.  Based on the conflicting news, they would change their minds a few more times before deciding the need for cash was too great.  It is as if the bubble in July and August never happened, and the price has now started lower after climbing higher for a period of years.  Those holding gold have already tipped their hand as to how much selling they will need to do.

Probable Outcome
It does not mean the price of gold, and markets in general, will drop 20 percent in a straight line, but it does begin to look like the fund managers have given up on Santa's arrival this year.

Are you hoping for the Santa Claus rally?

Thursday, December 8, 2011

Stop Losses

Hard Stop Losses
I like Stop Losses, I just don't normally use them - Hard Stop Losses, that is.  A Hard Stop Loss specifies that we want to sell when the price drops to, or below, the Stop Price we have entered.  This is so we can specify the selling price in advance, which means we don't have to sit and watch in case the price drops below that point.

Stop Loss, or Target?
While it sounds good in principle, my experience is Hard Stop's don't work so well.  The main reason being, if the market maker for the equity I own sees the opportunity to make a large commission by tripping my Stop Loss, that is usually just what happens.  In today's world, I don't know exactly how the orders are matched, but it has been my experience that the person responsible could usually make it to my stop to collect the commission, only for the price to continue higher from there.  I suspect it is even easier to do in today's electronic markets.  If the Stop Loss is too far away from the current price, they won't even allow it.  If it is fairly tight, or close to the price I want, then getting to that price is doable.

Exit Point
Don't get me wrong, though - I am one to say never enter a position without having an exit point.  If I am unable to watch the market during the day, then I wait until the end of the day to put in the sell order, if necessary.  If I am in doubt as to how far the market might move against me, I just sell, anyway.

Trailing Stops
I don't use Hard Stops and I don't use Trailing Stops.  These are Stops that trail the price by a given amount, or percentage.  Instead, I use trend-lines and technical analysis to determine my exit point.  When the price is trending, we can usually draw a channel within which the price will vary.  As long as the price stays within the channel, I continue to hold.  Once the price violates the channel, and breaks the trend, it is time to sell.  Once the new trend establishes itself, I take a new position.

Stop and Pause
Rarely is it a good thing to exit a trend and switch to the new one at the same time.  I learned a long time ago from sailing that when the wind begins to shift it will oscillate back and forth a few times before filling in from the predominate side.  The markets are similar.  You don't know which side the strong hands and the weaker hands are taking at first.  We want to do what the big guys are doing because that gives us the greatest probability of success.  Getting it wrong can get expensive.

Getting stopped out at the lowest price for the day is never a fun thing.  Instead, I use limit orders which specify the least I will accept when it is time to exit.  Do you use Stop Losses?

Wednesday, December 7, 2011

Berman's Call - Consumer Credit

Click Here To Play Video

The major question remains - will the spending we saw during Black Friday and Cyber Monday account for the bulk of consumer spending over the Christmas season?  In this video, Larry Berman talks about the enormous growth in consumer credit relative to the increase in the U.S. population.  Since the 1960's the average annual population increase has been roughly one percent.  The average increase in consumer credit has been eight times that - much faster than the rise in incomes.

Consumer credit is now declining.  While the great recession, and unemployment are big reasons for the decline, much of it can also be explained by demographics.  The average U.S. baby boomer owes a lot of money and is now at the age where they need a whole lot less stuff.  Their children have grown up, and they are past their peak spending years as they start to position for retirement (whatever form that takes).

Combine that with the need for governments and financial institutions to deleverage, and one has to wonder what the next catalyst to growth will be.  We have a huge Gen-Y gang just around the corner, but they are probably a decade away from filling the large, expensive shoes of the baby boomers.  I keep hearing about all that money on corporate balance sheets, but don't forget, the U.S. consumer accounts for about 70 percent of their economy.

What is your vote?  Are we going to see a big golden fourth quarter in retail in North America this year?

Thursday, December 1, 2011

November Portfolio Update

Click To Enlarge

November began with a classic triangle pattern.  All of the major North American markets made the pattern, but the S&P 500 illustrates it best.  It is a perfect example with volume decreasing close to the breakout point when the market finally dropped.  I got caught in the whipsaw back and forth before giving up.  From there, the drop was quick enough that I failed to find a good entry point.  

Click To Enlarge

Materials and Technology stocks are seasonally strong this time of year.  I expect to be long in them for at least a little year-end rally.    

The return I am showing for XIU (iShares TSX 60 ETF ) remains at the same level as July (when it crossed the 200-day moving average) since it continues to be at a price below its 200-day moving average. 

Eleven month return for TSX @ November 30, 2011 = -9.04 percent
Eleven month return for Basic Timing Model using XIU = -0.98 percent
Eleven month return for Advanced Timing Model (my returns) = -2.95 percent
Money for charity = $411.27

What is your plan?