Investment Strategies 01 (Nov 08 - May 10)

[learn2win]

Getting Ready for the Bottom
What to buy and how to know when it’s time to buy them
By Michael Kahn, CMT

written August 2008, posted November 18, 2008

Note- This article was written in August for a professional magazine aimed at brokers and financial advisers. It was never published. And clearly it did not anticipate the slow motion market crash that was to follow. While the techniques covered here are still valid, we have to step back a bit from traditional analysis and allow for a lot of volatility and false starts.

The biggest question on investors’ minds is when will it be safe to buy stocks again. It seems that every time the stock market surges higher there is some bit of news or some event that sends investors heading for their bunkers once again. But then again, that’s what a bear market is all about.

Rather than trying to time the bottom, investors would be better served to let the market take care of that on its own. The good news is that when the actual bottom gets near, the market also will generously provide many signs to tell us. We won’t be able to pick the absolute bottom but we’ll get in fairly close - and with much less risk.

One of the better observations made about the stock market came from Sam Stovall, chief investment strategist at Standard & Poor’s. He observed that during certain portions of the business cycles different sectors of the stock market outperform the others. For example, during the early growth phase, technology tends to lead the pack and it makes sense as corporations ramp up their investment spending.

When we overlay to business cycle over stock market performance in general, we can prove what most investment professionals already know – that the stock market tends to top and bottom several months before the business cycles tops and bottoms. What this means is that technology stocks, for example, will start to improve many months before the economy actually starts to expand

For those attempting to forecast when recession turns to expansion, the observation of when the stock market moves from bear market to bull market will give them a time frame for the economy’s change. A stock market bottom in late 2008, for example, will suggest that the economy will show great improvements by mid 2009.

But investment professionals and investors alike are not concerned with the economy’s bottom. They want to know when stocks are bottoming and clearly we cannot do that by observing the economy. Let’s state the obvious: we cannot predict the present using the future.

Stock market investors are luckier than those playing bonds or commodities. There are so many cross currents in the stock market and ways to slice and dice it that there are multitudes of clues to use to figure out what is going on. Sector rotation analysis, where we examine not just which sectors are making gains but which ones are leading and lagging the others is one of the more forward looking.

Where are we now? (remember, this was written in August)

Let’s put the sector rotation model into practice in today’s world. As anyone with an interest in the stock market knows, financial stocks were disasters for investors in 2007 and early 2008. In contrast, basic materials and energy were hot. Steel, fertilizer, gold, oil and coal all did quite well, not only beating the S&P 500 by wide margins but also making healthy absolute gains. In other words, they were leaders while banks and brokers were laggards and that is just what we’d expect to see as the general stock market is peaking

In June 2008, as the stock market was already caught in a bear market, basic materials and energy hit their respective ceilings and began to fall at a severe rate. Their leadership role evaporated and they actually began to underperform the market.

In troubled market times, and a bear market certainly qualifies, investors tend to move their money into so-called “defensive” areas that are less dependent on the economy and enjoy more stable demand and cash flow levels. Healthcare and consumer staples, a.k.a. consumer non-cyclicals provide that “shelter from the storm” and indeed both the Select Sector SPDR healthcare and consumer staples exchange traded funds (ETFs) began to outperform the market in June.

July saw the continued strength of selected health care groups as relative performance turned into absolute performance (tangible price gains). The iShares Trust Nasdaq biotech ETF moved higher from its trading range at the start of the month and by month’s end it had gained 12%. Not bad in a bear market!

It’s not a perfect road map but it does point us in the right direction in terms of stock selection. And it helps us in our goal of determining when it might be time to start looking at a broader approach to the stock market as it begins the bottoming process.

rest of article @ http://www.quicktakespro.com/bottom2.html

[winston]

A Market This Ruthless Requires Attention By Andrew M. Gordon

I've never seen the market so ruthless and so volatile at the same time. Wall Street is pouncing on weaknesses in sectors and companies. And because of the huge swings the market is making on a daily basis, when it attacks it really ATTACKS. Companies that had been fairly stable are going down 5-10 percent in one day... 30-50 percent in one week.

Some investors like to swim in calm water but hate to swim when it gets choppy. Is that you? Then get out of the market. No need to put yourself through this if it's ruining your sleep. But there are things you can do to protect your individual stock investments against all this white water.

* Independent due diligence. There's more reason than ever for companies to hide the truth from you these days - because with the market falling on its face, the truth isn't pretty. Instead of talking about dropping demand and lowering prices, companies talk about new and exciting products... or maybe upgrades they've made to their equipment... anything to distract you from the grim reality they're facing. Rely only on your own research and the research of people/experts you've grown to trust.

* Periodic reviews. You need to review your portfolio not every spring... or every quarter... but every month. Are you invested in "dead-man-walking" sectors like the auto industry? Restaurants? Retailers (except Wal-Mart)? Even Google has lost its luster. Things are changing from month to month... not year to year. You have to adjust.

* Look before you buy. In the past, when you went into your portfolio to buy more of a company, you probably did so because its shares were rising. But if you want to buy more of a company now, you have to review its latest developments first. For example, most solar stocks had great quarters last go-around. This time, it promises to be a lot tougher. Again, markets are changing fast.

It all adds up to more work for you. That's the price you pay for being in the stock market these days. Set aside one evening every month to review your portfolio. And pour yourself a glass of wine before you sit down. You may need it.

Source: ETR

[winston]

Understand Your Investing Personality
Anna Vander Broek, 11.14.08, 06:00 PM EST

Knowing your good and bad tendencies and making allowances for them can make you a better investor.
Understanding the way you react in situations of uncertainty can provide a lot of insight into how you deal with money, especially in today's shaky economy.

There are four basic investing personalities, according to a new study from financial services firm TransAmerica. During times of crisis, people tend to fall back on their basic instincts, and each of these different personality types reacts differently to change.

The idea here is that you want to be aware of what those instincts are so that you are able to make more educated decisions with your money. While the TransAmerica study was conducted on Americans over the age of 50, the results can be a basis for understanding the investment styles of Americans of almost any age.

Here is a breakdown of the different investing personality types:

Venturer: "Nothing Ventured, Nothing Gained"

Venturers are at their best when things are changing, because they are self-confident about their financial decisions. Because venturers thrive on change, they tend to make riskier investments. Venturers, however, need to be aware of their own limitations and should ask for help in situations that might be over their head.

Pursuer: "Pursue Anything Once"

While venturers enjoy change, pursuers crave it. They are quick decision-makers and will try most anything at least once. However, because pursuers tend to be fast-thinkers with short attention spans, they are constantly looking for the next best thing and have trouble sticking with their decisions and tracking their investments over the long term. Pursuers are the type of investor who would be most likely to buy high and sell low.

Anchored: "Stay On The Safe Side"

Finances make anchored investors very anxious. Anchored investors want things to stay the same and are unhappy when things change, so most don't feel comfortable putting their money into any risky investments. Anchored investors should consider working with a financial adviser or sharing investing duties and ideas with a spouse so they feel more secure making decisions with their money. They may be missing out on good investment opportunities.

Adapter: "Take It As It Comes"

Adapters are the most flexible of the bunch. They don't crave change, but once they make the decision to change, they follow through with it. They typically think before they act, and their actions reflect their current situation. The adapter is the most realistic type of investor and tends to excel when the market gets shaky.

You may not find you are completely one type of investor but that you have a few qualities of each. Simply reflecting on how money makes you feel--excited or anxious--is a first step in better understanding yourself. Once you understand the type of investor personality you have, you will find yourself more in control of your investments and your emotions.

Right now, our economy is going through many changes. You should feel comfortable with those changes so you make decisions that are best for you.

[supermanxf]

was going through AA website and realise that beside TA and FA, there are quite a couple of other trading strategies.

Does anyone know if these strategies can be apply to singapore market?

Care to share the experience of using such listed strategies in singapore market?

[kennynah]

besides TA and FA....what other tools are you referring to ?

[supermanxf]

example: dogs of the dow, Canslim and other few.

[millionairemind]

example: dogs of the dow, Canslim and other few.

Hello Supermanxf,

A warm welcome to Huatopedia

You are free to start any investment strategy thread as you see fit. We already have a Value investing thread and a CANSLIM thread.

Value Investing
viewtopic.php?f=16&t=1353

CANSLIM
viewtopic.php?f=16&t=262

We are also very fortunate that the value investing thread is populated by practitioners in our forums. All roads lead to ROME

We look forward to your many posts in the future

Cheers,
mm

[winston]

There's also a threads on:-
1) Short-selling and Buying Puts
2) Trader's thread

[winston]

A Common Sense Approach to Investing By Charles Newcastle

A wise teacher once told me, "Common horse sense is not so common." And investors seem to overlook common sense now and again.

Let's say we stop the presses right now. We disconnect the Internet and Satellite TV, and push all of the papers and magazines on our desks into a cardboard box.

We sit at our desks in complete silence.

Without referring to any notes, commentators, or anything else - try to rely on everything you've learned up to this point in your life.

Now ask yourself, "Which sectors have the greatest upside potential over the next 2 to 5 years?"

Home healthcare? The Internet? Defense? E-commerce? Natural resources? Online gaming? Write down your answers and use them to begin your stock-selection process.

That's how I start my process. I start with the sector that has the greatest upside potential - and work back from there.

Ask yourself which sectors "should" do well based on everything you know up to this point. Your answers will amaze you. Sure, you'll be off the mark once in a while. But most of the time you'll be right on the money.

Source: ETR

[winston]

A stock strategy that works in a broken market By Dan Ferris, in the S&A Digest:

[Yesterday] morning, SocGen global-equity analyst James Montier quoted the following from a recent report by Bridgewater Associates titled, "The Performance of Individual Stocks During the Great Depression."

The best 20 performing large companies sailed through the depression relatively unscathed. Their earnings were roughly flat from the peak in 1929 until the bottom in 1933. On the other hand, the earnings of the worst 20 performing large companies fell so much that the losses were nearly as big as the prior profits. Despite this radical difference in earnings performance, the prices of the best 20 and worst 20 earning companies fell by similar amounts, -80% for the best and -96% for the worst.

In other words, it did absolutely zero good to know which were the 20 best-performing businesses among publicly traded companies. Either way, you lost most of the money you put into stocks. If this is the Greater Depression, as Doug Casey calls it, stocks are not the ticket.

Aside from the Great Depression scenario, Montier wrote about two other possibilities – one based on the experience of Japan from 1990 to the present, during which time value investing beat the market by 7% per year. The overall Japanese equity market from 1990 returned about -4% a year. But if you bought the cheapest Japanese stocks by price to book value and held them, you made 3% per year. If you also shorted the most expensive stocks, you made 12% per year.

Sounds like a plan: Buy quality value and short overpriced crap.