Wednesday, 27 February 2013

Not out of the woods yet

With a 100 point rise yesterday, the DOW crept back above the support level it had broken on Monday. But a glance at the chart shows the move was far from convincing. Volume was low and there was a pull back from the high at the end of the day. So the period of uncertainty continues. I am still holding tight and hoping for the best.

The S&P500 shows a more pessimistic pattern. It shows a distinct downturn in the market. So far, however,  it has respected a support line that was established back in November. A break of that support line would add weight to the bearish side of the scales.

In Continental Europe stock markets appear to have been thrown into turmoil by the Italian election and various jolts that result from news about the Euro Zone and its difficulties. The movement of the German Dax shows what I mean.

The UK seems to be following the DOW. Although it is weak it hasn't shown the same degree of volatility. There is however lots to worry about.

Tuesday, 26 February 2013

Beginning of the end?

Am I wrong? 

My bullish stance received a blow last evening as the Dow tumbled in the last half hour of trading. I paid the price as my shares, some of which I had only just bought, earlier in the day or on Friday, tumbled.  I face these problems because I want to make decent profits as the market goes up, but also keep those profits when the market goes down. I need to sell when I worry and buy back when my confidence is restored. This means lots of activity, generating more heat than light, when the market is choppy. I just have to take it on the chin when the market is undecided about its direction.

The charts shows my present problem very clearly. The market was weak but trading continued above the support level, established over the last three weeks, until ten minutes before the close. It then slumped. The volume was slightly above average but gave no clear warning of sustained danger. The volume peak 5 days ago might still be the unresolved danger signal.

Today European markets have been weakened by the uncertain result of the Italian election and have followed the US market. Surprisingly the € and the £ are strengthening a little after a prolonged decline.

All in all it is hard to guess what will happen next. My best bet is that the pullback will be temporary so I will hold on until circumstance s prove me wrong.

The shares I have bought in the US to replace those I sold on Thursday are NTWK, GASS, TESO, OMN, RUTH, FLO. So far only NTWK has proved a winner putting on 13% in two days.

For my wife’s portfolio in the UK I clearly messed up my timing by repurchasing INCH, ABF, ISYS, OXIG and I replaced ITV with SDR.

Thursday, 21 February 2013

Where now for QE?

It’s all money

It’s been a while since I’ve seriously had to bite my nails but today is one of those days.

I don’t think I have explained an important part of my trading philosophy for some time. It’s something that a lot of people find hard to understand. Put simply it is this: it’s all money. Most people think that think there is capital and there is income. For me there is no difference. Over the past few weeks my portfolio has been rising in value in leaps and bounds and I am sitting of a profit of some 14% on my capital (capital being my word for my starting stake). At this moment I am almost fully invested so all of my money: the amount I started with plus the running profit can best be described as money at risk –because it could all vanish in a flash. If I sell all my shares the money is no longer at risk and I have crystallised my 14% of profits. I can walk away and spend the profits and I am no worse off than I was at the beginning of this bout of trading. Any dividends I pick up on the way are part, albeit a small part, of that profit. When I feel confident I can start all over again.

Bite those nails

Yesterday the US market took a tumble in the evening. All part of the daily ups and downs except – the immediate reason for that fall was a comment by the US Federal Reserve that they might reduce quantitative easing. Those of you that have been paying attention will know QE is my big bug bear. I think it is the reason for the giddy ascent of the stock market. That market, I believe, is where all that money has gone. There has been no serious, sustained inflation anywhere else. Journalists have a job that makes them too hyper to pause to understand anything much. They are saying traders think less QE will hurt the economy. The market is affected by the fear that the taps will be turned off and no more money will flow into shares.

So I must bite my nails. Should I liquidate and realise those tasty profits of mine before they evaporate? Or is this a blip? This afternoon I shall have to decide.

STOP PRESS I have sold all my wife's shares and am bracing myself for a sell off of my own this afternoon.

Fences, starringLenny Henry

Why was I not at home watching when all this came to pass? Because I was privileged to be at a fabulous opening night at the Theatre Royal in Bath. A stunning cast: Lenny Henry, Tanya Moodie, Colin McFarlane, Terence Maynard Ashley Zhangazha, Peter Bankole and Tranae Sinclair acted their socks off and created a stunning rendition of August Wilson’s FENCES.

I had not heard of Wilson before. He died aged sixty in 2005 having created a cycle of ten plays called the Pittsburgh Cycle and picked up two Pulitzer Prizes on the way.

He was born to a Sudeten German Father and an African American mother in the Hill District of Pittsburgh. His plays deal with the African American experience, each set in a different decade. FENCES treats  the 1950s. The play is beautifully constructed and is littered with wonderful lines. It tells the story of a life without resorting to an obvious plot line.

Lenny Henry gave a stunning portrayal of the stereotypical Afro-American father, Troy, whose three children are borne by three different women (Interestingly it was Wilson’s white father who was absent from his childhood.) But less stereotypically Troy is driven to stay and support his wife Rose and son Cory by a profound sense of duty. A lesser performance than that given by Tanya Moodie as Rose, Troy’s wife, would have ruined the balance that was necessary to carry off a true rendition of this relationship. Her character is a match for Troy and Moodie depicts this perfectly– anything less would have failed. 

Colin McFarlane gives fantastic support as Troy’s lifetime friend, Jim Bono. He matches Henry in long scenes of banter which describe black working class life. Its spells of imprisonment and years of hard, unrelenting graft. A small but important detail is that the accents are convincing and never slip for a moment

Ashley Zhangazha shows the fear and suffering that made life so difficult for the son of an overbearing father. He also shares a beautifully executed and moving duet with Tranae Sinclair as the threads of the story weave towards their conclusion.

Terence Maynard completes the picture that Wilson draws of his main character – acting the part of his mad brother. It falls to Maynard to carry off a terrifying tour de force – a mad comment on the pain of life – which closes the play.

A night to remember. Don’t forget to go. This production deserves to succeed.

STOP PRESS I have sold all my wife's shares and am bracing myself for a sell off of my own this afternoon.

Wednesday, 20 February 2013

What about the UK

Making money in dear old Blighty

Since I have abandoned trading in the UK you may think I have nothing to say about that market. In fact I am helping my daughter and son in law and, more recently, my wife to invest in the UK with some degree of success.

Neither want to be bothered with regular trading or watching the market. So, again using Vector Vest, I have designed a system which should enable them to make decent money while changing their selection of shares no more than twice a year. There is a caveat: if I see the market heading for a cliff, I would advise them to liquidate . Then wait, with cash ready, until the market looks more promising.

A tortoise on speed

My daughter bought her first batch of shares in August and should be replacing them about now. Her selection and the profits achieved were as shown below (details of individual shares are to be found by typing in their symbols at yahoo finance of google finance):

Six month profit
profit per week over six moths
profit per week since 23/1

The figures speak for themselves. The return over 6 months was 15.1% which compares with the FTSE which rose by 9.3% over the same period. The weekly increase achieved was 0.5% which, if sustained for a year would yield 31%.

I also show that since 23rd January the shares have increased by 1.6% per week. The significance of this figure will be revealed in a moment.

The shares are selected on the basis that they are in the FTSE 350, they have a consistent and predictable earnings performance, high quality fundamentals, improving dividend payouts and the share price has lagged somewhat. 

The backtesting which I carried out before recommending this selection of shares predicted a decent outcome and what was achieved was in line with the prediction.

My daughter had ethical constraints on her final selection and these were taken into consideration so the pick was not exactly the one made by the filter, but it was close enough.

The tortoise gets supercharged

I ran the same filter for my wife on 23 January. The shares selected and their performance were as follows:
profit since 23/1
profit per week since 23/1

That average of 9.5% compares with the increase in the FTSE over the same period of 2.9% The rate of return here is astonishing. If it continued for a year it would yield over 100%.It also compares favourably with the return on my daughter’s portfolio which achieved 1.6% per week since January 23. This suggests that the idea that the portfolio ought to be refreshed every six months is valid.

We pass 14000

And how about the US market. The Dow has poked its nose above 14000. Its a little over 150 points below its all time high. Will it get there is the big question. I am fully invested so I guess I am on the side of the bulls. As always I am ready to throw in the towel at a moment's notice If I see the bears appearing in the wings.

Sunday, 17 February 2013

President's Day holiday means we shall have to bite our nails for a little longer

Dow Jones and S&P both showed a small spike in volume on Friday. These spikes often precede a change in direction. They indicate that traders are suddenly showing more interest and are either picking up shares ready for a rise or dumping shares in anticipation of a fall. The pattern of trade during the day may show which way the market is going to jump. A push upwards late in the day may indicate an upswing as buyers take advantage of lower prices. A push down suggests the opposite, traders taking advantage of higher prices to dump shares.

The fact that Friday's volume spike came after several days of flat prices makes it exceptionally hard to guess which way the market will jump. Looking at the intra-day graph shows that there was a significant rally at the very end of the day. A promising sign.

The S&P shows a similar pattern though the final push was not so marked.

We have to watch and wait. Tomorrow the US market is closed for President's Day so the wait will be a little longer. Perhaps the European markets will offer clues as to what will happen on Tuesday.

The proximity of 14000 and the all time high in the US indices are the big bugbears. They will be worrying traders and bulls will have to be very determined to push the markets onward and upward.

At least the weather is looking a better. The farmer who keeps cattle in the field behind our house says that in all his 40 years of working the land he has never known it so wet. Each morning we watch him struggle, working his way across a mire that looks like a first world war battle field. His cows need to be fed and one way or another his tractor has to navigate the mud to reach his animals. Close to the feeders they have dropped hay and silage and have created a platform to stand on. They eagerly watch the tractor approach with their feed. Further away from the feeder they wallow, thigh deep. Let's hope there are several dry days, if not weeks, to dry out the land.

Thursday, 14 February 2013

Shares I have bought

How I started 

Since I started to take the stock market seriously I have always been a stock picker. I have attempted to find shares that, for one reason or another, are undervalued by the market. They seem poised for reappraisal. I chose this approach because it offers the chance to significantly outperform the market without taking undue risks.

I find my shares by back testing. I pick a theory of what criteria should predict which shares will outperform and then test to see if it works.

When I started there were few resources to help me do this and it took a lot of painstaking and boring work to find a reliable method. The theory behind my stock picking filters came from an analysis of 100 years of stock market data published in a book called What Works on Wall Street by J.P. O'Shaughnessy. I back tested my ideas using data provided on monthly CDs published by an organisation called REFs designed by Jim Slater. It still exists and works the same way as it did when I used it 13 years ago. From this I created my own filter which saw me through my first 12 years trading on the UK market. Since that time buying and selling shares has been my sole source of income. I started with what these days is a rather paltry pot of cash but despite that I have lived well.

What I do now

I now have an alternative. In the US a company called Vector Vest offers a fabulous data base which allows the back testing of all manner of ideas. It makes the development of theoretical filters difficult because of its quirky presentation of fundamental data. But it more than makes up for this because back testing is very easy.

In my last post I explained that I had given myself a very well aimed kick in the pants about the beginning of December. I then jumped on board the Vector Vest train. Its site provides a range of almost 300 selection filters for picking shares. They are available for the UK, the USA and a number of other countries. I patiently worked my way through them all to discover which were the best predictors of future share price movement. I started by making a short lit of those which have worked well recently and then tested the members of that short list for strong performance month in and month out.

I did this work for the US and the UK and found the best performing filters for each market. Over the next two months I bought shares based on these criteria and did well, especially in the US where my overall return is up to about 20%. Since my results in the UK struggled to achieve a quarter of that performance I have now switched almost all of my holdings to the US.

I am using a range of selection criteria and they have changed as I have refined my methods of back testing.  Currently I look for four main groups of shares:

  • shares that are undervalued when measured by their forecast earnings and earnings growth. They have had consistent earnings growth in the past, and have seen good share price appreciation which suggests the market is beginning to understanding that the price needs to be reassessed. In addition the share will have shown a significant increase in earnings in the past quarter
  • shares that are increasing in price rapidly, have a rapid earnings growth rate and they moved up in price on the day before purchase on higher than average volume
  • shares in the S&P 500 which have had their prices beaten down to very low levels and might now bounce back
  • Shares that have recently improved the overall quality of their fundamental performance but are low in absolute price
Some of the returns I have achieved have been spectacular. I show below the shares I have bought since January 2. The first group Ihave sold to realize either profits or losses. The return has averaged 1.3% per week. I have mostly ditched under-performing shares so returns are not as good as shares I continue to hold. 

Here is a list (In order to find out more about the shares I have in my portfolio go to Yahoo Finance or Google Finance and search for the ticker symbol I have given):

date of purchase Share % growth per week Date of sale
22-Jan GTN 17.7% 11-Feb
02-Jan BBY 8.6% 25-Jan
02-Jan BBY 5.6% 11-Feb
02-Jan PBI 5.3% 07-Feb
18-Jan SNFCA 3.7% 29-Jan
02-Jan CHK 3.2% 28-Jan
02-Jan AMD 1.3% 24-Jan
03-Jan SPMD 1.0% 31-Jan
02-Jan KSS 0.9% 28-Jan
03-Jan DEXO 0.8% 31-Jan
18-Jan PGTI 0.0% 11-Feb
11-Jan SCMR -0.2% 01-Feb
22-Jan GTIM -0.5% 11-Feb
18-Jan HW -1.4% 29-Jan
16-Jan SKUL -2.0% 31-Jan
10-Jan IQNT -2.3% 31-Jan
18-Jan MHO -3.1% 31-Jan
10-Jan MLNX -3.8% 29-Jan
22-Jan SSYS -10.4% 29-Jan
Average 1.3%
The shares which I am still holding have returned an average of 2.3%

date of purchase Share % growth per week
01-Feb CPSS 15.2%
11-Feb CIMT 14.1%
05-Feb STRZA 11.1%
03-Jan WFR 6.2%
02-Jan BSX 5.7%
04-Feb CPSS 4.3%
02-Jan MU 4.1%
11-Feb VHS 4.1%
23-Jan CMLS 4.0%
04-Feb MEI 3.8%
22-Jan PBI 3.7%
30-Jan GRPN 3.6%
31-Jan FBP 3.3%
30-Jan FBP 2.7%
04-Feb EOX 2.6%
22-Jan CHK 2.6%
22-Jan KSS 2.2%
22-Jan JCP 2.1%
11-Jan HBAN 2.0%
22-Jan BBY 1.5%
25-Jan AAPL 1.5%
05-Feb MXWL 1.4%
16-Jan ALLT 1.3%
30-Jan NMR 1.0%
01-Feb TA 0.9%
23-Jan VIRC 0.5%
23-Jan GBNK 0.4%
01-Feb SWFT 0.3%
03-Jan SOMX 0.2%
02-Jan FTR 0.2%
30-Jan MNST 0.0%
01-Feb DHI -0.1%
22-Jan NEM -0.2%
28-Jan LSI -0.4%
12-Feb TVL -0.9%
25-Jan BTU -0.9%
04-Feb HCA -1.3%
25-Jan COH -1.7%
31-Jan SPNS -1.7%
05-Feb SBGI -1.7%
04-Feb OMX -2.0%
Average 2.3%

Just think what this means. 1.3% per week carried on through the year would achieve over 60% return. 2.3% would achieve well over 100%. 

It is most unlikely that good times will continue for the whole year. But assuming that I make the best of the good times I should still do well. 

In the first 6 weeks of the year I have made over 18% (That includes contributions from some shares bought last year.)

Monday, 11 February 2013

Sorry I've been away

I haven't published anything on this blog since June. Should I come back? I met up with some friends the other who seemed to be missing me and asked if would I let them know if I were to start up again. I feel wet admitting that I needed the vote of confidence to keep going. But there you go.

Back in June it was a ruthlessly dull market and I seemed to be repeating myself. I guessed my readers were as bored as I was. Unable to make money on the downside and no upside in prospect I buried my head in the sand and gave up.

Without realizing it, I had lost my nerve. For twelve years I had done so well in good times and in bad. And then in the year ending April 2012 I suffered my first bad loss. I continued investing into the next year and money started to flow in again till the end of May. And then I proceeded to lose it all. Not surprising given what was happening in the market but normally I could weather those storms. In my blog I tracked the gyrations that followed but made no money. I avoided the fall that started mid October but made nothing betting on the bear market using CFDs. Clearly that is not my forte.

I was a lost soul and only came to my senses in early December. I kicked myself hard and reminded myself that my talent was in share picking. With the market on a role I had to be there.

The start was shaky because of the pullback that occurred over the Christmas period. But I had the confidence to sell, take my losses and pile back into the market as soon as the rally resumed.

I invested in three markets: Hong Kong, New York and London. Hong Kong did not work and I have converted my holdings of HK$ into US$. My returns on investments in the US were 4 times that in the UK. So I made the decision to move all my investments into the US.

I have hopes that this will prove to be the right decision despite the considerable extra costs of trading my ISA in the US. Holding foreign currency in an ISA is not allowed so each time a share is bought or sold I have to pay the cost of currency conversion. In addition my ISA provider does not support the full range of US stocks.

Despite these disadvantages in the space of two months I have made excellent progress. In cash terms I am 2/3 of the way to making my cash target for the year (the money I need to live) and I am well over half way to achieving my ideal percentage return of 18%. What I need in the last two months of my financial year is a positive stock market environment. I think the odds are in my favour.

So what are the chances of a flat or rising market up to the end of March?

Two thing lead me to believe that luck may be on my side. The first is the unabated willingness of governments to print money. This money is not generating price inflation (so far). House prices remain in the doldrums. The main asset inflation is on stock prices. My guess is that the stock market is where all that cash is going.

Secondly the charts look promising.

The long term chart shows that the Dow Jones is reaching the level it achieved in October 2007, its all time high. It is not surprising that traders have been forced to give pause for thought. 

However the point reached by other main indices such as the FTSE and the S&P suggest quite a way to go before they too hit the ceiling of the level reached in 2007.

A further encouraging sign is the lack of any crescendo in trading as the market approaches this dangerous level. The daily moves up and down do indicate that there is a fight going on between the bulls and the bears. But unremarkable trading volumes suggest that no-one is trading with conviction. That suggests to me that a continuation of the rally is more likely than a reversal. Time will tell if I'm right.

I'll write again later in the week and tell you how I have picked the shares that are doing well for me so far and how things are continuing to pan out.

All support through comments and followings will be gratefully received and will encourage me to keep going.