Is it the news, or is it the charts?

The newspapers are full of the fact that the US Government is about to close down a variety of its services because the Congress refuses to vote budget measures through. As ever its after the fact: an easy answer to the question: why has the stock market fallen today?

Just look at the chart and it is obvious that the odds were excellent, before the news, that the market would fall by a hefty value. Indeed the market is currently pulling back from its low point for the day so far, so it might not turn out to be quite so bad.

The interesting question, and the one to which there is no answer: will the market bounce back from that support level at around 14900? I am not going to guess.

What I will say is that if that support fails to hold there is little certainty left until the market reaches the 14000 area. There the old all time high of October 2007 at around 14200 provides one level of potential support; and a diagonal support line which started life back in November 2011 provides another at around 13700.

Lets hope for the best and brace ourselves for the worst.

Is there any money out there?

There have been five days of fall in the current market pull back. It's fallen by just 3% to its lowest point (2.2% measured on the S&P). And then yesterday it staged a rally when prices were pulled to and fro throughout the day.

Hard to know what to make of this. The last pull back was 6% and lasted 17 days. The one before that lost 6.5% in 23 days of dramatic tension.

It is this push me pull you that is making it so hard to make money and so easy to lose it.

It's easy enough to say hold on and you'll make the money back after a pull back. But what if this is the big one, the crash that WILL happen. It's easy enough to say sit on the sidelines and wait. But what if the market takes it into its head to stage a new bull run. I cannot afford to be left behind.

You will remember that I did all that backtesting. So where has that left me? You may well ask. But there is nothing here that the back testing has not taken into account. We are in a period of heavy draw down. A time when the system fails to generate money. Instead profits are sucked out of the portfolio by a market that remains in a bull phase but is characterized by short term ups and downs.

You may remember that I introduced the ten day rule that reduced the drawdowns. Reduced but did not eliminate them.

Market manipulation

A friend has sent me a couple of interesting articles from people who believe that there is far more to these tricky market conditions than meets the eye. The main theory is that the Gold Exchange Act of 1934 specifically allows the US Government to manipulate the gold, AND any other market through its Exchange Stabilization Fund and that it does this in a clandestine manner through intermediaries. Therefore we live in a world where markets are rigged. These commentators believe that the manipulation favours super rich investors and preferred institutions (who have the capital resources to ride the waves) at the expense of the poor and the middle classes.

Not much we can do about this, if it is true, except to attempt to play even smarter.

What have I got left in my portfolio?

I have just three shares left in my portfolio, all in the UK. 

There's GVC which is set to grow its profits at 45%, has a prospective PE of 6 and yields 7% in dividends with a prospective dividend yield of 10% next year. I've bough some more of this.

GVC Financial performance

FSJ and CKN both of which are in the shipping business which appears to be on something of a roll.

There are two US shares that I would like to buy back. DRYS and GNK. Also in shipping. I foolishly picked them up when they had gone through a massive price increase and were due for a pull back to allow the price to breathe. I suffered all of that readjustment. I am awaiting my chance to jump back in.

Good luck everybody.

Bite the bullet

Monday was almost as bad as I expected. The UK opened fairly well so I put off dumping my shares. Mistake. I took a hit, not terrible but bad enough. I started selling when the US market showed that Monday was definitely going to be a follow through from Friday's dive. If I had been quick enough in selling I would have lost nothing on my US shares but I left it a few minutes too long so a couple of hundred pounds disappeared before all the shares were gone. Not as bad as the loss on UK shares that was around seven hundred.

My holding of US shares has been hit by the strength of the pound and the weakness of the dollar which exaggerated the weakness of my selection.

The American shares I picked under-performed the market. This was true of the UK holdings too. All in all a miserable campaign. But its better to take losses when prospects are poor rather than hold on when a big pullback is on the cards. It is a really wicked market for making money because of the repeated pull backs from all time highs and repeated assaults on those highs.

And behind it all the threat of the withdrawal of quantitative easing. If the policy is all about strengthening banks' balance sheets I would guess it is working well. But devil take the hinder-most.

Sinking feeling

On Wednesday, despite expectations, the US Federal Reserve and its chief Bernanke decided to continue to pour money down the throats of greedy bankers. The response was  hurrah in the form of a surge in the stock markets around the world.  It was big but not massive. Those guys know that the evil hour has been postponed but that it will come. The market made another new high and then crashed on Friday This time it was with massive volume.

Part of the reason for this surge is that quadruple witching (when a variety of derivatives expire and have to be repurchased or cancelled) pushed up volume. It coincided with a re-balancing of portfolios by tracker funds as the index components changed.

I never ignore big spikes in the volume of trade because they almost always coincide with a shift in the direction of the market. Result is that I am left feeling distinctly queezy. I am well invested. My purchases have yet to show a decent profit and here I am being forced to sell.

I cannot say I am looking froward to Monday's open. I strongly suspect I shall be forced to grab what I can as the market follows through on Friday's dive. Hey Ho. That's the way it goes sometimes.

At least the S&P fell less than the DOW suggesting that it was the large capitalization shares that fell most. Not the shares I buy.

Comparison across the world

Here's an interesting comparison of how the world's markets have moved in relation to each other over the past year.

Market good, selections bad

I am really having a rough time. As expected the market is continuing to plod upwards but my share picks are struggling to say the least.

UK selection

UK first. I mentioned a few days ago that I was doing some research on VV stock picking in the UK market. Any of you who have attended the recent seminars will have heard about the picking of stocks that have the following characteristics:

Stock Value (as defined by VV) >price

RV>=1.3

RS>=1.25

Price is above 89 day moving average

Buy when VV gives confirmed up call

I subsequently heard that the lectures have added the notion that the picks work best when they are held over longer periods of time, i.e. you grit your teeth and hold them through little pull backs. I back tested and its quite true; as long as the market does not crash.

When I tested the system back in the days of 2007-8 to check to see what would have happened when the market was less benign the results were horrible. 

I also tested to see what would have happened if the shares were bought on confirmed downs instead of confirmed ups to check on the VV timing system. Here are the results of my tests.

Conclusion:

• the search criterion works very well indeed
• it works best over 6 months and 12 months 
• performance is not so good over 24 months
• it works better when shares are bought on VV confirmed up than on VV confirmed down but the difference is not as great as one might expect

HOWEVER

• When the market is falling sharply as it did in 2007-8 the system returns a huge loss.
• Since it is not possible to distinguish between a short term pull back and the beginning of a market crash, using the system to buy and hold carries significant risks from which VV timing systems offer no protection.

With these results in my toolbox I thought I would have a go and bought the top five shares that came up in the search. It's early days, but they have lost me money. -4% including costs which includes half a percent stamp duty. I'm holding on, after all they are long term picks, but I'm not happy. 

I ran a test to see how my regular unisearches would have worked. There were a couple that would have done better - up 3% was the best, but generally they struggled. We are only a week in so I just have to grit my teeth and hope fore better things.

US selection

The US performance was nothing to write home about. With one exception, ZHNE which is showing an 11% return, every one of the picks is a loser. GNK is currently worst showing a 19% fall. Maybe I should have been more careful since it was looking peaky. 

Average fall is 3.5%. Again I have to remind myself we are only one week in and things can change.

Weeks like this are not much fun.

The long view

From time to time in our efforts to guess what might happen next on the markets it's a good idea to look back. The cliche that the past is no guide to the future is drummed into us until we forget that the past is the ONLY guide we have to the future. Our lives, if we live them well, are modulated by learning from experiences. Education is teaching us the experiences of others. Wisdom is knowing how to choose which experience is going be the most helpful when we make our best guess about what will happen tomorrow.

So let's take a sweeping view of what has happened on a long, long time scale: 18 years and then 113 year. For 18 years we will look at the S&P rather than the DOW because it encompasses a much wider and more comprehensive range of shares. For 113 years we will look at the DOW because that's what is available.

In the last 18 years the S&P has risen by 190% or 6% pa. However it has been a bumpy ride.

• In the first five years the market made over 160% or 21% pa
• It had a second thrilling run starting at the end of 2002 and lasting to the end of 2007 when it gained 105% or 15.5% pa
• and then there was the period that started in early 2009 and has continued to the present with two short though violent breaks. The first two runs lasted 5 years each and the present one has lasted four and a half. This time the gain was about 150% or 23% pa

And then there were the crashes:

• The tech bubble wiped over 50% off the value of shares in just over two years
• The sub-prime mortgage crisis  and the banking crash that followed wiped 58% off the value of shares in not much more than a year

What can happen in 100 years 

Lets go to a chart of the DOW that goes back all the way to 1900. It is shown on a logarithmic scale so it is easier to see percentage growth.

The first thing to say is that the market had been rising reasonably steadily from 1989 to the big pull back of the that began in 2000. That is over 10 years of bull run. In that time the market rose by 575% or almost 19% per year.

No wonder people have been advised to invest in the stock market with all that folk memory behind us. 

Over the whole one hundred and thirteen years the story looks far less rosy: the market has gone up by a bit less than 23000% which, over that long period, equates to a bit a bit less than 5% pa. 

So what we are seeing is lots of stops and starts  The 89 to 2000 period was one of the longest good periods. There were the heady 7 years from 1921 to 8 when the growth averaged 29% per year. It was followed by the great crash when shares lost almost 90% of their value.

So we can comfortably endorse that other cliche: 'the value of shares can go down as well as up'. 

However: 

• We seem to be in a period of flatness: measured by the S&P the market has only risen by 9% in 13 years (less than 1% pa)
• the up periods during this phase have almost reached the speed of growth seen in the 1920s bubble which ended in the biggest crash seen so far. They have ended in 50%+ crashes
• earlier periods of flatness such as 1906 to 1924 and 1964 to 1983 have presaged strong bull runs.
• periods of flatness (or should we say periods of little progress), including the current one have been characterized by violent ups and downs 

Lessons?

My conclusion is that the history of the stock market suggests that we may be approaching a new bull run.

Nevertheless we may not have cleared the area of choppy water that characterizes those periods when the market makes no headway for decades at a time. 

The pace of growth is dangerously fast and we may well see another 50% dive before we finally get a new long bull run.

My current holdings

At last I am seeing my new holdings recovering some of their early losses as the market plods upward.

Rough week for me and Vegetarian cottage pie with chestnuts and mushrooms

It was all pointing the right way on Monday when I got my buy signal. Tuesday and Wednesday were good strong up days and yesterday saw just a little pull back. I duly picked my shares in three batches, on Tuesday, Wednesday and Thursday but up to now my picking  systems have let me down badly.

In the US I bought DRYS,SIGA,GNK,CTHR,ZHNE,SID,KTOS,GGB. Only CTHR is showing a profit and DRYS and GNK look horrible. Re-examining the charts for those two, retrospect suggests I should have been more careful. They were already extended having enjoyed a huge run up.

They are both in the same sector. Dry bulk shipping which is benefiting from a massive rise in freight rates. In theory this should translate directly into profits. So they could still come good.

The FTSE also saw a nice run up but my picks of UTV, BOY, LLOY, INCH, KLR have yet to offer any decent returns. Yesterday I bought FSJ and CKN. They are in the marine freight servicing industry, they have shown steady price growth and should benefit from the market movements that saw DRYS and GNK skyrocketing. They are the best performers in my UK picks even though I only bought them a day ago.

It is early days but the losses hurt.

I pulled out of my small gold holding which looks to be going nowhere.

The big lesson from all this is that the world economy must be on the mend. Such a sharp rise in dry shipping rates suggests that world trade is on the move. Watch out for that tapering and higher interest rates. US retail sales figures are out later today which should give more guidance.

Vegetarian cottage pie with chestnuts and mushrooms

A vegetarian friend came to supper. It is always a challenge finding something unusual to cook. This one did the trick, though my wife had some reservations. Luckily guests seemed satisfied or they were ultra polite.

For the topping I boiled vegetables all chopped small: 2 large potatoes, 3 parsnips, 3 carrots, half a celeriac. When they were soft I mashed them with plenty of butter, about 75ml of milk and a desert spoonful of french mustard.

In the mean time I made the filling by frying 2 chopped carrots, 12 whole peeled shallots, 5 cloves of garlic (chopped). I then added , fresh rosemary,  a desert spoonful of tomato paste, a couple of tsp of Marmite, a tin of chopped tomatoes, a generous splash of white wine, and quarter of a pint of vegetable stock. I added a pound of mixed mushrooms of all shapes and sizes (you can get so many types in supermarkets these days) and 200gms of cooked chestnuts, I used the vacuum packed sort and halved them. 

I put the filling into an oven proof dish and spread the topping over. I added some grated cheese (my favourite is cheddar). I then baked at 180 degrees for half an hour and finished under the grill to brown the cheese.

My wife's complaint was about the amount of tomato paste which she thought dulled the flavour. Try reducing or excluding the tomato paste if you would like to cut back on that rich tomato taste. I think you would have to add some flour for thickening to replace the paste.

On the cusp

It looks as though today is the day when I shall have to stop waiting and hoping that the market will not give me a buy signal. It seems that on due reflection that the market has decided that tapering will not start this month and that there is still opportunity for upward momentum in the market. I have two caveats:

• How long will it last? and will I have time to bank some profits? 
• and where are the big players? volume of trade remains low.

I have to jump on board or get left behind.

Futures suggest there will be a follow through today. And the FTSE presses on.

So, heart in mouth, today I will buy some shares.

Not a day for the faint hearted

The US market broke out of resistance almost a week ago but  it has yet to give me a buy signal. The market closed on Friday with very little change. However, there was a drama that all took place in the first couple of hours of the day. And what a day it was. I cannot imagine how I would have been feeling if I had a position in the market.

At the open it was over 60 points higher but after five minutes it began to tumble and dived almost 200 points in the next 30 minutes. After that it recovered all of that lost ground over the next hour and a half and then continued to rise a little more so that by lunchtime it was up on the day. In the final hour it proceeded to lose the ground it had gained and closed a little lower than it had opened.

The first chart shows how all this panned out, five minutes by five minutes, with Thursday's movement for contrast to show that Friday was unusual.

So what happened? There were two important news announcements. The non farm payroll (we would call them employment figures in the UK) and the unemployment figures. The market always has an idea of what to expect when these figures are released and normally reacts when the figures are above or below expectations.

The unemployment figures were in line with expectations but the Non-Farm Payroll increase was much lower than expected. There should have been big disappointment because the figures mean that the economy is not doing so well. But we live in an Alice in Wonderland world. Good news is bad because it means that the Federal Reserve is likely to stop printing so much free money and the asset inflation which has been driving the market will come to an end and vice versa.  Hence the initial spike. But here was a degree of confusion because there was substantial revision to earlier figures which meant it took a little while for the market to chew over and digest what the figures were saying. Some thought that money printing would stop others that it would continue. By the time the market closed no-one knew what to think so the market ended more or less where it started.

Interestingly, despite the drama of the day, there was no big shift in volume of trade suggesting that the smart money has yet to decide what to do. I wonder what Monday will bring?

A lesson from Friday's price action is that once the market gets it into its head that QE will end and interest rates will move upward we will likely see a huge slide (hence the 200 point fall inside half an hour). No time to run and hide. You have been warned.

Bull run?

You see what I mean about no fear. Yesterday the US Senate has agreed to vote on the use of force in Syria and the market bounced upward. By midday it had climbed over 100 pints and there it stayed for the rest of the day. Volume stuck at the 14 day moving average. Futures indicate a follow through today.

The UK market recovered all of its lost ground in the afternoon and is also poised for an up day today.

My heart is in my mouth. The US market has broken resistance and there is not far to go before I get my signal. My worry is this. Will the market run for cover if and when the guns begin to fire? Is this a classic bull trap? Is the smart money trying to lure the unwary to buy their shares while the going is still good?

What to do?

Bulls and Bears

Yesterday was a good day to follow up on the refresher I provided at the weekend. The DOW has flatlined for four days. It is struggling to choose between breaking up through 14939 and 14765, the high and low of last Tuesday's candle. Yesterday started with a bullish run as the price rose to a high of 14933. Then the bears took over and pulled the index all the way back to 14777 by the middle of the day. And finally the bulls were out again but they only managed to push the market back to 14834.

It was a struggle that left us with no clearer idea of where the market is headed than we had on Friday.

I give no credence to the idea that the market is reacting to news about Syria. A truely nervous market would have moved far more decisively. We live in a world where fear has disappeared from the markets - for the time being. There is still too much cash around and it is in the hands of traders who have forgotten what a crisis is like. I am still sitting on the sidelines and am waiting for a signal.

The UK Market

I have done a bit of exciting research about opportunities in the UK market but more on that when the research is further down the line.

In the mean time the FTSE chart is interesting. It too has flatlined for about eleven days since 20th August. There have been lots of ups and downs but the end result has got it nowhere. It had a big upday on Monday as traders anticipated the beginning of the Autumn season when US traders returned from their Labor Day break. But it has come to nothing as the US market has shown no appetite for a renewed rally.

A bit of revision

Yesterday I was asked by a good friend and loyal reader to provide a refresher on how I set about my analysis of the market. So here is the first in what I plan to be a series of essays which cover the basic elements that make up my thinking about the market. For those of you who know it all and are only interested in the bottom line, just skip to the end of this post for my latest thoughts.

First let me remind you that I do not claim to be a fount of wisdom. I do what I can and in this blog I describe what I see and how I interpret it.

Playing the stock market is a fascinating occupation and in some ways is unlike any other. In most disciplines you learn your skills and strive for perfection. In playing the markets the important qualification is realising when you have got it wrong and knowing what to do next. Mistakes are inevitable. That is not to say you don’t try to get it right for as much of the time as possible.

There are just two things I am reasonably good at:

• One is picking shares when the time is right
• The other is not being there when the market turns sour.

 In this first refresher I am going to describe how I try to pick my moments for entering and exiting the market. And when I say exiting I mean selling up and going into cash. No half measures. A falling market pulls down all shares including good ones.

So here we go. All basic stuff. No rocket science. The market is made up of buyers and sellers and by watching the way the price moves I try to guess where the market is headed next. I see price action by looking at the graphs of market price movement. Because I want to know how the whole market is moving, I look at the “Index” which measures what the market is doing.

Mostly I look at the daily chart, so that is where I shall focus my attention. I favour candlestick charts because provide lots of information about what has happened during each day's trading. A little imagination allows you to interpret what has been going through the minds of the market participants. Knowing this helps me  guess what is likely to happen tomorrow.

What each candle shows

Each candle on the chart represents one day’s price action. First the colour:

• If the candle is red the day’s closing price is lower than the previous day’s closing price
• If it is green the price closed higher than the day before
• If the colour is solid the price closed lower than the level it opened in the morning
• If there is a white middle to the candle it closed higher than it opened in the morning

The body of the candle (the fat bit) represents the movement between the opening and closing prices for the day.

The two thin “wicks” above and below the body show the highest and lowest prices that the price achieved during the day.

Those wicks give some information that can be used to infer what was going through traders’ minds during the day. A long wick below the body suggests that sellers succeeded in pushing the price down by dumping the stock, but buyers sensed the opportunity to get a bargain and pushed the price all the way back up again.

A bunch of committed buyers in the market makes me think that, other things being equal, there will be a follow through and the market will go up tomorrow. And vise versa.

A column of marching candles

Looking at a column of marching candles tells me where the market is heading. There are only three ways to go: up, down or flat.

The market has a sort of collective mind. With the right sort of skills one can guess what that mind is thinking. Imagine you are reading the expression on your friend’s face to judge if she is happy or sad, angry or calm. Reading the market by looking at the charts is a bit like that.

At any time there will be players in the market who think that shares are cheap and will want to buy more, and those who think shares are too expensive and will want to sell the shares they hold.

The mass of shareholders will be doing nothing, but they don’t count. They will just sit there and pat themselves on the back when the market is going up and say to themselves “how clever I am.” When the market falls they will wet their pants and still do nothing until it's too late.

Collective memory, support and resistance and trends

Traders who are active in the market behave as if they have memories of what has happened before and this recollection is reflected in a shift in the balance of buyers to sellers. It’s a bit like a conditioned reflex. When the price reaches a certain point the balance switches and a market that has been going up will change to go back down and vise versa.

These boundaries are support and resistance lines. They can hold for days, months or years. When price action respects these lines the market is said to be trending. Buying shares in a market that is trending upward is the road to riches. Spotting the end of one of those trends, the break of support, and cashing in profit is the key to fortune.

The market also remembers old highs and lows and when it reaches those points it also encounters resistance or support. These are drawn as horizontal lines on the chart.

At the bottom of the chart a vertical line how many shares were traded each day. Occasionally the volume of shares bought and sold spikes. This means that the market has been more active than usual. I pay special attention to these spikes because it suggests to me that a shadow has passed across the face of my friend and I can expect a change in her mood. 

\That's enough for now. There'll be more another day. I hope this helps to clarify the comments I make each time I post.

Back to Friday's action

Friday's action was not decisive. Monday is Labor Day. It's a holiday in the US and traditionally it signals the end of the summer vacation period and the beginning of the Autumn (Fall) and winter term in the stock market year. What happens next is anybody's guess and Friday's action gave no clues.