September 2012 Returns

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September was not all that bad, this year, considering its history for being the worst month of the year.  It is a good illustration of how seasonality is based on probability, not certainty.  Having said that, I am still concerned about this market, particularly since we seem to be deviating from what I would consider to be normal seasonal patterns.  In itself, that wouldn't bother me so much, if it were not for the fact the major technical pattern called a head and shoulders, which I wrote about earlier this year, is still intact.  

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The momentum indicators I follow would indicate the market is heading lower.  If that turns out to be the case, the fact we did not make it above the previous high from last February is more bad news.  I would not be surprised to see the TSX drop below the 200-day moving average which is only some 150 points, or so, lower than the close of today's market.  We could get there in a single bad day!  

The returns shown above use the XIU ETF as a buy and sell signal.  The idea is to buy when XIU is above it's 200-day moving average, and sell when it is below.  Bad things can happen in the markets when they are below the 200-day moving average.  The real danger is, however, if we get down below the 11,000 mark.  A pattern such as this would indicate going back to the lows in the last Great Recession.  It will be interesting to watch - the markets normally finish the year stronger, but that was not the case is 2008, either.  If we do see these things begin to happen I will be looking for opportunities to short the market (using inverse ETF's) rather than looking for buying opportunities.

21 month return for TSX @ September 30, 2012 = -7.86 percent
Return for Basic Timing Model Using XIU =          11.97 percent
Return for Advanced Timing Model =                    -4.36 percent
Money for charity =                                            $0.00 

Are you expecting a year-end rally?

September To Be "Nasty"?

If you are familiar with my blog, you probably know I advocate using the 200-day moving average as a buy/sell signal.  Bad things tend to happen when the market is below its 200-day moving average.  David Mcalvany compares today's markets to 1987 - low volume and high volatility.  The big drop in 1987 came just after the market had sunk below its 200-day moving average (in October).  Currently the markets are above their 200-day moving average, but I do not expect that to continue during September/October.  When that happens, it could be a good sign to take some money off the table, if you haven't done so, by that time.

What would it take for you to reduce your equity portfolio?

Bearishness

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Risk On; Risk Off
My desire in writing this blog is to share my years of experience in the stock market in the hope of helping others to be successful.  My approach has evolved over the years, and continues to, as the opportunities arise.  Currently, I am trading Exchange Traded Funds (ETF's), rather than individual stocks.  Lately, the market has all but ceased trading on fundamentals, and is following some irrational "risk on", "risk off" approach.  ETF's add diversification and more predictability during these highly volatile times.

Nothing To Show
Because of the market volatility I am trying to develop more of a trading methodology, with mixed success.  Since I am not at the point where I feel this would be helpful to others, I decided earlier in the year to share my investing club trades in this blog.  The problem is there hasn't been any trades.  Prior to the end of last year we purchased two inverse ETF's.  One makes money as the Nasdaq goes down, and the other as the TSX goes lower.  We are also holding some silver coins.

Moving Averages
None of those positions in our investing club has proven profitable, year-to-date.  With the exception of the Nasdaq, neither has there been any longer term signals which would justify reversing these positions.  You might know from other posts on this blog that I recommend using the 200-day moving average to manage risk.  The TSX has been below its 200-day moving average most of the year except for a brief high it made at the end of February.

Invest Responsibly
I have three reasons for remaining bearish.  In order to take a responsible and more conservative approach, I am not going to recommend bullish trades to my readers or to members of my investing club while the TSX remains below its 200-day moving average.  While I might take a more aggressive approach with my own personal money by making very short-term tactical trades, sharing those would not be helpful to people who aren't sitting in front of their online investment account all day.

Long Term Trends
Secondly, long term trends are negative.  The deleveraging required to restore government budgets and remove most of the unnecessary  risk in financial markets is going to take years to come.  Demographics will not substantially improve before the end of the decade.  If we look at the U.S. markets they have already reached a peak according to the Elliott Wave theory.  Trust in government intervention is almost all that is currently propping the markets up.  Wait until everyone wakes up to the fact it isn't going to make any real difference!

Head & Shoulders
The third reason is the technical pattern called a Head and Shoulders which the TSX is making.  This is a very bearish pattern which, if we break the horizontal neckline just beneath the recent lows, it could mean a possible return to our 2008/2009 lows.

Cash Is King
I know there is a segment of investors who would scoff at my lack of returns this year.  They would say four or five percent dividend returns is good in this environment.  Those are likely the same people who lost half, or more, of their life savings during the last great recession.  Let's see - four percent upside and 30 percent downside, that is not a bet I am willing to make.  As for not knowing when to get back into the market, I know where that point is, and it is NOT here, except for very short-term tactical trades.  In the mean time, my funds are mostly in cash, thank you very much.

That is my outlook.  Does your outlook differ?

February 2012 Portfolio Update

For the iShares TSX60 ETF (XIU), I am showing the gains made by using the 200-day moving average as the buy/sell decision point.  It has been a little over a year, and already the benefits can be seen over a buy and hold approach.  Of course, those gains would be slightly less with commissions factored in.

No new trades in my portfolio (Model in the chart above) since Feb. 08.  I am being too cautious, but want to avoid any sudden drop the European situation might cause.  Also, the qualitative easing by the U.S. Federal Reserve will start to wear off at some point.

Seasonally, we are entering the time of year when the TSX is running on all cylinders as the Material, Financial, and Energy sectors tend to do well.

Two month return for TSX @ February 29, 2012 = 5.76 percent
Two month return for Basic Timing Model using XIU = 5.92 percent
Two month return for Advanced Timing Model (my returns) = -1.13 percent
Money for charity = $0.00


How about you?  Are you cautious in this market, or are you looking forward to good times ahead?

January 2012 Portfolio Update

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I don't have anything to show for January results, this time.  The XIU timing model was below its 200-day moving average for the month.  Until the XIU crosses above the 200-day moving average, there is nothing to count, year-to-date.  My personal results are flat.  According to my calculations, the TSX is up 4.16 percent at the end of January.  I have some catching up to do, but after the bee-line higher the markets have made since the middle of December, I expect at least a small correction, shortly.

If you read my December portfolio update, then you will know I started off this rally in a Materials Exchange Traded Fund (ETF), but the volatility quickly stopped me out.  It turns out, it was a poor choice, because I missed out on a nice gain made by even less volatile ETF's.

As for this time of year, Materials, and Financials are in their strong season.  Energy will be, by the end of the month.  It seems a lot of analysts are talking about technology stocks, but we have just passed the part of the year when they are strongest, so I am waiting until later in the year, after the market has pulled back, again.

Are you optimistic, or pessimistic regarding the markets?

Using The 200-Day Moving Average

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The 200-Day Moving Average
Plotting the 200-day moving average involves computing the average price for the previous 200 days,  then for another 200 days starting one day later, and so forth for the specified duration.  The reason for using moving averages is to smooth out some of the day to day volatility.  The longer the current price is above the 200-day moving average, the higher the average, resulting in the line on the chart curving higher.  Of course, the inverse is true when the price remains below the average.



Technical Analysis
Any student of technical analysis soon learns of the 200-day moving average.  When the price is above the 200-day moving average, that is taken as a positive sign.  When the shorter 50-day moving average crosses the 200-day moving average from below, that is also seen as positive.   Since there are 5 market days in a week, the 200-day moving average is also the 40-week moving average.  Today, not many people would probably assign much importance to a period of 40, but in the Bible, it was always seen as a significant period of time, whether days, weeks, months, or years.

Transition Point
The Basic Timing Model I propose on this blog uses the XIU Exchange Traded Fund (ETF of the largest 60 stocks on the TSX) and the 200-day/40-week moving average as the transition point from a good market to a poor one, or from a poor market to a good one.  It can also serve as a level of resistance when the price is below, and a level of support when the price is above.  The direction the price is headed will often reverse right at the 200-day moving average.  Whether this is self-fulfilling, or not, is irrelevant.

XIU
Such is the case with the price of the XIU ETF on the TSX.  The price has been steadily rising since before the end of last year, crossed yesterday, only to go lower today.  For people without the benefit of any knowledge of technical analysis, yesterday's price crossing the 200-day moving average would be taken as a buy for equities traded on the TSX.  Myself, I prefer to play the probabilities afforded me through technical analysis.  The above chart shows us the trend is growing rather tired.  Longer term, and perhaps even in the shorter term, the price would appear headed above the 200-day moving average, but the probability is the price will go lower than it is currently before continuing the uptrend.  I always look for the possibility of buying lower and selling higher.

Net Return
It may make little difference in the long run, but careful analysis could prevent us from bouncing in and out of the stock market as the price struggles in an effort to cross the 200-day moving average.  Regardless, buying  as the price crossed yesterday (after selling when it crossed going lower last summer), would result, according to my calculations, in an almost 6 percent gain relative to those who rode the market all the way down, and back, again, since the moving average has dropped that much during that time.  If/when the price rises above the 200-day moving average, it may signal a more favourable market, but given the headwinds the stock markets are facing, I am still quick to take profits when I can.

Questions?  Comments?

November Portfolio Update

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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.  

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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?

Opportunities Created In The Markets

When The Market Gets It Wrong

Let's talk about another common misconception regarding timing the market.  I am referring to the belief  that market timers always have to know what the market is going to do.  In reality, timing the market means taking advantage of the periods of time when the market misprices assets, times when others get it wrong.  I know, in the past, the academics have said this couldn't happen, but I am not alone in saying it happens all of the time.  The price of an ounce of gold dropped around one hundred dollars the other day.  Since gold is, well, gold, are they telling me the value of the U.S. dollar, which gold is priced in, changed so much that the price of gold should correct by that amount?  It doesn't take a rocket scientist to see the price of gold was relatively overbought, meaning, relative to what people have been willing to pay for gold in the past, the price was, temporarily, too high.

Playing The Odds
Note that I said temporarily.  I don't necessarily know what the price of gold should be all of the time, but when it reaches extreme overbought or oversold conditions, the odds are it is going to revert to a point where it is less so.  As it does, it will usually begin a new trend.  If the previous trend was up, then it normally begins a new downward trend.  If it was down, then the opposite is likely.

All In
With a "buy and hold" approach to investing, we have to commit to putting all of our money in the market all of the time.  Since people using such an approach don't believe there is any method for determining the extent to which assets are mispriced, their approach is to average into the market over time.  Consistency and regularity are the key.  Their belief is that there is no pattern to the markets.  So, how is it they perversely expect markets will consistently trend higher over time(?!).  Sorry, I digress. 

Market Extremes
In the so-called timing of the markets method,  I don't necessarily care about the direction of the markets.  If gold is extremely overbought, it can correct lower, no matter what the market is doing.  As far as the price of gold goes, I don't care what it is doing most of the time, I only care when it gets extremely overbought, or oversold.  The same goes for the markets.  I don't have to know what the market is doing every day, until it gets to one extreme, or the other.  Of course, the one exception would be when a reversal is followed shortly thereafter by another reversal.  If a return to the original direction of the trend creates a situation where I start to lose money, I exit the position.  I feel no compulsion to be fully invested all of the time, I simply wait for another opportunity.

Up, Down or Sideways
During long periods of time, the market can trend sideways, rather than making new highs or new lows.  There can be significant periods of time when the market is going nowhere, or going in the opposite direction of the longer trend.  I don't need to be fully invested while this is happening.

On The Lookout
Yes, others would say, but that means you have to be watching the market all of the time.  To, that I ask, your point is what?  Whenever I have money in the markets, I should be watching.  Why would I go away and ignore what is happening to my hard-earned savings?  To those who say they don't have time, I would argue it takes all of 10 minutes to check.  If I use what I call the Basic Timing Model which uses the 200-day moving average as a buy and sell signal, there is little I need to do for most of the year.  The prices of market indexes normally cross their 200-day moving averages only once or twice a year!   

Why Pay More?
To use a shopping metaphor, timing the market is like purchasing items only when they are really, really, on sale, or selling them when they are highly over-priced.  The rest of the time I can prepare my shopping list and check what constitutes a regular price.  The regular prices don't interest me, so until I spot a really great sale, I don't need to feel like I should be spending all of the money I have available.

How often do you check what the markets are doing?

Is It Time To Sell?



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Dollar Cost Averaging
Rather than Buy and Hope, I mean Hold, I use the 200-day moving average to guide me in my investing decisions.  This has not always been the case.  There have been too many times in my past where I didn't know about things like moving averages.  Having money to invest meant dollar cost averaging into the market by tossing in set amounts of money at set intervals.  While this tends to average out over longer periods of time, I began to learn about a better approach.

First, why hope for average returns, when you can do much better?  Second, nowhere is it written that we must be fully invested all of the time!  Of course, this is total heresy in the eyes of the financial "experts".   Still, repeat after me, "Buy and Hold is, first, a marketing strategy, rather than an investment strategy".  Sorry, I digress.

200-Day Moving Average
My own research and my own experience going back decades, suggests that bad things happen in the markets after prices fall below the 200-day moving average.  Sure, things can go wrong when prices are above the 200-day moving average, but catastrophes can be avoided by stepping aside when below that level.  Did you know the largest single day price drops in the stock markets came after prices had declined below the 200-day moving average? 

Program Trading
If it was true in the past, it is likely even more so, today.  Large fund managers employ something called program trading where large numbers of transactions are executed by computer according to predetermined conditions.  I'm guessing, but I would bet dropping below a 200-day moving average is one of them.  Wikipedia suggests that in 2006, program trading accounted for between one third and one half of all trading on the New York Stock Exchange every single day!

Good News; Bad News
So, am I suggesting we should sell everything and wait for a better day?  First, I will remind people that I am not qualified to make such recommendations, but I will tell you I have taken my profits long ago.  For people still in the market, however, there are some encouraging signs.  Daily charts are in oversold territory which means we should see a bounce higher, and the S&P500 Index and the Dow Jones Industrial Index have not crossed their 200-day moving averages.  Neither has the commodity index.  However, there are no guarantees.  As long as a stock we own, or the TSX, in general, is below the 200-day moving average, there is a greater chance of negative surprises. 

I know there are just as many people out there who believe these conditions make great buying opportunities.  That is what makes a market.  Buying on the way down is great when it works; not so much when it doesn't.  Me, I am into capital preservation.  I'll hold onto my cash for other future opportunities, thank you.

As always, I welcome others' thoughts on this, and other topics, even if they are different from my own views.  What do you think?