How trends end - part 1

The ends of trends

I'm going to start with a bit more review of Crowd Money. It grieves me to say it but it is a tedious read. Too much repetition and a rather dense style. A great pity for once you have managed to plough through you have learnt so much excellent stuff.

I'm going to pick out bits and pieces in the order that I find most useful. The thesis is that the stock market is driven by human psychology and the way the psychology of market participants is driven by events. Very specifically we're talking about supply and demand. Share owners' actions a motivated by their expectations of what will happen to the prices of shares that they own and by their innate beliefs.

There is strong evidence that the most powerful driver of belief about the future is that it will be a continuation of the past. The crowds of share owners will only be forced out of their inertia when the facts force them to change. Hence Treacy's very compelling analysis of trend ending.  He identifies three types. I'll only deal with type one in this post. More soon!

Type 1 Is characterized by a sharp acceleration of price movement which is a sign that a crash is imminent.

Take a look at silver in 2010 -2011. The changes in demand and supply that this chart reveals work like this. At the end of the ranging period some new story about the prospects for silver drove up demand. The previous supply demand equilibrium was broken and prices began to rise until a point was reached when the consensus view decided that prices were high enough. More of those holding silver were encouraged to offer their holdings and/or fewer new buyers were tempted in.

The positive story persisted and demand began to outweigh supply once more. This time even more buyers were encouraged to buy because they were kicking themselves for missing the first part of the rally. They now held the belief that the market would rise because that is what it had done before. As the expectation of rising prices was reinforced by actual rising prices more and more buyers were sucked in by fear that they were missing a fabulous one way road to riches.

At this stage many participants were buying on margin - buying shares with borrowed money. Eventually there were no new potential buyers left and the price was so high that increasing numbers of holders were tempted to take profits and a dramatic reversal took place. Buyers on margin were forced out of their positions because their equity in their holdings had been wiped out, catalyzing the crash. Other late buyers saw their profits disappear and joined in the rush for the exit and supply was ramped up some more.  

A sign that often confirms a type 1 top is taking place is a key day reversal. This is a candlestick pattern in

which the daily price movement as shown by a candle, engulfs the previous candle. This means that the price starts the day up, suggesting that the upward price trend will continue. But as the day wears on supply overwhelms demand and the price ends below the previous day's open. See the chart of the DAX for an example.

In most cases a reversal of a downtrend exhibits very similar characteristics to the ones just described though the moves are in the opposite direction.

I'll post description of the other two main reversal patterns shortly.

The Dow

In the mean time the uptrend in the US market moves on with what looks like a normal pull back today. There is some narrowing of the lines that link the top and the bottom of the trend but it is too early to say if this has any significance.

 

Why don't I listen to myself?

You may remember that a while back, it must have been in May because it was all about 'sell in May,' I told myself to sit on the sidelines. Did I heed my own advice. Of course not. I'm not talking about special situations like GVC, I'm talking about full scale return to the market.

I've only myself to blame. There I was kicking myself for having lost out on the relentless rise in the markets so I thought I'd give it a go. I should have known better and I've paid the price. Yesterday I pulled out of the US market - you will know what shares I bought because I wrote them all down. Anyway here I am feeling a lot like the Brazilian football team in the World Cup. At least I pulled out before any serious losses were incurred. But there were losses none the less. And I do have a couple of minor victories to report.

My foray into the gold market ended well. Not only was my timing close to being right on entry. I missed the big first day, but I was there for the second. I picked good shares and they almost all raced away. I also jumped off the train as it turned and I banked 2.4% in three weeks.

I also made some nice picks in the UK market using a tried and tested old method for selecting shares and made 5.5% in EXI since 1st July and 10.5% in GEMD in a week. I've proved to myself that I can still do it and that I am not wasting my time even though I am having so much trouble at the moment.

And then there's GVC which trundles on increasing revenue (helped by the World Cup) and raising its already mouthwatering dividends. I do worry that there may be some bad news at some point. No evidence whatsoever, just the anxiety that such a good story can't go on forever.

Crowd Money

And that brings me to my latest reading. Crowd Money by Eoin Treacy. 

Several years ago I spent a small fortune going to a one day presentation called the Fuller Money Chart Seminar (now known as the Fuller Treacy Chart Seminar). I also subscribed for a while to these guys' daily service. The seminar taught me a lot and the service was good but far too wordy for my taste. 

I can't read through the volumes of, admittedly, terrific stuff that is churned out day after day. They must spend hours scouring the torrent of material produced by the investment community, but they also select and republish material that their subscribers glean from the world of economic and market texts. The analysis they choose to publish comes form all over and since they also comment on the items it is a fabulous resource. If you have the time to work through it. Even though it is not for me (my brain is too small to absorb so much) I cannot recommend it too highly.

On top of that there is the most comprehensive chart library that I have ever seen. It is access to that library that I miss the most. You can try out the service for yourselves for just £55 for a month - and I do recommend it even if you do not subscribe regularly. You will not be disappointed.

So back to the seminar and the book. The seminar has been running for 44 years and has been enjoyed by serious stock market types, mostly professionals, across the world. When I went I think only about one quarter of delegates were paying their own way, the rest were sent by the institutions who employed them. And now Eoin has distilled the important features of that seminar in a book. DO NOT MISS IT. For just short of £30 you have the benefit of two lifetimes' investment experience.

I knew it but did not remember clearly enough

The chart seminar, and now the book, is all about the psychology of the crowd that is the market. Charts betray what is happening in the collective mind of that mob. The trick that I missed in this current stock market rally was that I listened to the Gurus who crawl out of the woodwork at every market bottom and preach a mantra of never ending gloom and markets that will fall to zero. My big folly was that I could not get their words out of my head and went on believing their rhetoric. I missed almost the whole of a five year bull market. (I've made a measly 5% per year over the period).

I'll give you more of a review of the book in the next few posts but here is a taster of what I should have known all along. 

Crowds get swept along by a madness that keeps them thinking that the market will go on in one direction forever. They listen to pundits who whip up the fever by predicting ever more action in the prevailing direction. 

For example, the dot com bubble provided a paradigm that would never end. Companies did not have to generate earnings because they were in an industry that would sweep the world to a new and better place. Naysayers were ridiculed and the bull market went on and on until the point was reached where there were no more buyers. Everyone was in and leveraged to the hilt and now there was no more money. At that point there were only sellers and the market began to tumble. Even then the pundits did not give up. The stockbroker Killik was notorious, telling their clients that every pull back was a buying opportunity and encouraging them to throw good money after bad.

By now, cautious commentators who had been ridiculed as eccentrics, came into their own and the market was talked down until the bottom was reached. But some continued to talk down the market  at the bottom, just like Killik at the top, warning of the Armageddon that was to come. The only way to survive was to take what money you had left, turn it into gold coins and go as far away from civilization as you could. There you would hole up and watch the smoke rising in the far distance. 

I bought a book by just such a pair of pundits in 2009. It is called Wake Up! by Jim Mellon and Al Chalabi.

It was not entirely their fault. Their message played into my generally pessimistic, or at least overcautious, mentality. So I was receiving their message loud and clear and was not critical enough.

Bottom line is that Eoin Tracy's book has reminded me that I was foolish to hold on to the message of doom for so long and I plan to have a ceremonial burning of Wake Up! later today. 

In the mean time I am starting to look at charts in a quite different way and hope I can make a little money before this bull market is over.

More on Crowd Money to come.

Bleak week

I haven't posted for several days. As you know I went back into the market thinking my fear had been keeping me out for too long. What opportunities I had missed!

Did I pick my moment! Withing days I was deeply regretting my move and I am still nursing my wounds. But this time I have held my nerve a bit better.

First things first. I bought more shares based on a selection system which has a good record - shares that have shot up in price on high volume. I bought: VRS EVRY DRL CBAK

The first pull back came two days later. I lost the money made on my first day out - no big deal. Then another bad day and I lost a bundle.Another bad day and another big loss. By now my nerves were giving out and I ditched the worst performers.

I do run risky share picking systems and I win or lose in big numbers very quickly. In the present case I'm talking of losses of 10-12% in a couple of days.

A market recovery brought me back small beer and I lightened my load a bit further. Then the big crash as the Espirito Santo Bank in Portugal threw a wobbly into the market and there was a huge fall.

Panic stations? I looked at the chart and could see that support had  been broken, but only just. As the day moved on the markets regained their calm and the recovered to well within the support line. I held my nerve.

The next day my portfolio staged a strong recovery on a weak market move. The other thing was that only two of the stocks I ditched continued to fall. By selling the rest I sacrificed a big chunk of recovery money. I've always hated stop losses and this is why. There is almost always a bottom in that market somewhere, and it's always darkest before the dawn. As long as the market has strength and you pick your shares using good selection criteria it's best to hang in.

It wasn't all bad

There were two bright spots in all of this. My UK shares held up well with GVC returning to an uptrend. This was despite the fact that the FTSE lost almost 4%.

 And my gold shares have proved to be a smart move. They have made 6.7% since the 20th June. They behaved strangely during the pull back but ended very strongly up.

Bottom Line

The support line has held. The US economy is still strengthening and although the QE will come to an end the US government is still pumping huge amounts of cash into the banking system so for now the rise looks set to continue.

 

I throw in the towel

It is with the greatest trepidation that I report that I am back in the market. It's not that I have overcome fear, I am terrified, it's that I can no longer ignore what my eyes are telling me.

The dow has broken a six day downtrend to make yet another new high. (I ignore the little voice that says triple top.)

The S&P ploughs on upwards. It is now 30% above its last high and almost 90% above its low in March 2009. And I have benefitted from almost none of that activity.

The FTSE has not performed nearly so well. After a stellar start in 2009 and 2010, it has limped along. 

My performance over those years has been dismal. I have been wrong footed at every turn as the market performed well at a time when I thought disaster was about to strike.

• I made decent money in 2009 but had my worst performance relative to the market ever.
• I made money and comfortably outperformed the market in 2010
• 2011 was a disaster
• 2012 was another good year with good market outperformance
• 2013 was another bad year (market up, me down)

In those 5 years I made a measly 24% return on capital (a bit less than 5% per year) while the market went up by 63% (Note for historic reasons I use the FTSE as my benchmark). Unfortunately I cannot live on that so I have been eating into capital. 

I turned the corner in November and I am comfortably outperforming the market with only 20% of my funds in the market. This means that the money that I have at risk has returned 39% - almost 60% on an annualised basis.

Enough of my moans, groans and self comforting revisionism. 

What I have done is bought a raft of UK shares looking for my old stalwarts - companies which are outperforming the market, have low PE and good growth prospects. To these I have added some that have exceptional dividend yields and other solid characteristics. My selection: ACHL EXI BRIT CAML - may the force be with me.

In the US I have added to my gold portfolio (which is performing well). I have chosen based on VectorVest search criteria that have been good performers recently. The selection is JOEZ ENZN FORM PQ AXAS HILL and PAM. I have also had another go at India (SCIF).

I now just hope and pray that my timing was not seriously off.

Dow uptrend solid, oil prices waning

Yesterday's price movement for the DOW has one massive message: the bulls are firmly in control! The market made an effort to follow through on Wednesday's dive but the attempt was squashed by buyers coming back and bouncing the market off the support line established at the end of January. Since that low it has made an 11% rise.

The FTSE is enjoying similar support, even though its pattern does not demonstrate such a powerful move to the upside.  It has only managed 6.5% since the low. The difference is that although the UK has been showing a better economic improvement, that has meant strong signals that an interest rate rise is in the offing.

My big problem is clear. I continue to see trouble ahead (without moonlight or music). And while I have that fear in my bones I am reluctant to take advantage of the market's strength. That has been my trouble all along. and it means that my portfolio is unable to make progress. I have done well enough since the beginning of last November when my luck turned a corner. I have made 7.4% since then while the FTSE has made no progress at all. And I have almost kept up with the DOW which is 8% higher.

But this is not good enough and I have been struggling through June. That was partly because of that foray into the US market in the first week followed by my quick exit. It is partly because I banked GVC's dividend in May and have to wait till August for the next one. And lack of news from GVC means that the upward momentum has stalled (even at today's price it yields 8.4%).

So I just have those newly bought gold shares. They gave me a fright a couple of days ago. But they have hung in and yesterday they recovered despite weakness in gold and silver prices.

Mr Market seems to have decided that conflict in the Middle East is no threat to oil supplies and the oil price spike has been short lived. Looking at the chart it seems to sit comfortably inside the pennant that has been forming since April 2011. It could fall another 3-4% before it meets support.

So I have no plan other than to hold gold and silver miners and GVC unless I see another short term opportunity. I am looking hard and will let you know if I find anything.

All that Glisters

There is an faint indication that someone is worried. After my unhappy foray into the market in the second week of June followed by a very rapid exit. I found myself once more on the sidelines  nursing a small but painful loss. But then came a glimmer that suggests I am not the only one worried sick about what might happen. Just a couple of days ago there was a sharp upturn in the gold price.

I've jumped on board with a raft of gold and silver miners that are doing reasonably well so far. It is a risky strategy but so far so good. My selection is as follows SBGL MDW FSM BVN PPP and EXK all on the US market.

And all the time the Dow and S&P plod on upward.

There has been a movement in the oil price but it is still muted and is not out of line with what we have seen over the past three years.

Recipe with no name

Still, it has been a lovely summer so far. I patched together a delicious spaghetti recipe. It has no name so suggestions welcome.

Gently fry one red onion, a couple of peppers (colours don't matter), an aubergine (egg plant) cut into cubes. When all is soft add a can of chopped tomatoes, three or four chopped gherkins, a tablespoon of capers, half a dozen chopped pitted green olives 150 mls vegetable stock, a tablespoon and a half of red wine vinegar and a tablespoon of soft brown sugar (you can adjust quantities to suit your taste in sweet and sour). Salt to taste. Add water if necessary. It is lovely as a spaghetti sauce and leftovers will make a sort of cold ratatouille for lunch tomorrow.

Stock market crashes I have lived through

I'm throwing my theories out of the window. Yesterday saw another new high on the S&P. and another upward push on the Dow. All because of the FOMC statement. What was in that statement?

• good economic news - economy doing well
• inflation below target
• further reduction in QE
• measured reductions in QE for the rest of the year
• no early interest rate rise

I guess the interest rate guidance was the thing that swung the mood of the market. I also keep forgetting that reduced QE is still QE. The Fed. is still handing the banks $35bn of almost free money per month. Plenty of money to pump into a market where businesses are benefiting from better economic growth, low inflationary pressures, and an easy labor market.

All this leaves me in a serious bind. I pulled out of my last little move into the market in a hurry with minimal losses but after the last time, just days ago, I have nothing invested. GVC has had its run and is now basking at a new high level, waiting for the next bit of good news no doubt. I am frightened of repeating a new foray into the market at a new high level.

News from Iraq continues awful. Yes Saddam was dreadful, but this must be worse for a battered population. News coverage is remarkably subdued. So we have to watch and wait on that one too. And all this time Ukraine simmers in the background.

I'll just watch and wait.

You'll be bored listening to me fretting about the market crashing. But I promise that it happens. And when it does the results are devastating and the thunder clap comes out of a clear blue sky.

Here's a chart to show you what I'm talking about. I admit that the 1929 crash was before my time but I have lived through the other two.

PS I forgot the 1987 crash which literally came from nowhere. It was known as Black Monday. It hit in August and by October the market had lost about 40% of its value. None of the explanations of why that crash occurred makes a lot of sense. What is interesting is that within two months the market has resumed its upward trajectory but it took two years to regain its previous high. Here is a chart to delight you. Ideally an investor would have been in cash when the slide began and bought bargains when the market resumed its rise. Staying in would have cost serious money which would not have been recouped for two years.