Buying Stocks

European funds might be unloading Asian and EM stocks, so hold off any purchase of stocks even though some of the entry criteria mentioned in this blog are met.

For small losses on some positions, it might be better to square them off as we have still not see any major correction like a drop of 1000 pts in HSI or 200+ pts drop in Dow.

An update will be issued next week as I will be out of town.

Europen Chaos

The storyline these days in Europe esp PIGS is about exchange control and bank runs which are very difficult to deal with. When your citizens is afraid of exchange control and started pulling money out of banks, then even central bank has a severe problem on hand. No banks can withstand continued withdrawals by her depositors esp ECB is not a lender of last resort.

Imagine the final days before South Vietnam was about to fall and people pulling money out from the banks, there is no way to stop it other than exchange control and imposition of withdrawal limits.

Once such controls are imposed, there could be contagion spreading to other countries in similar dire situations.

This is a very plausible outcome when politicians are still dilly dallying about what to do when what they have in mind is all about votes. It would take something of a crisis proportion to push them into action.

Greece exiting EU might be a better option serving as a negative example of a very bad outcome after exiting EU to other PIGS countries.

OVERVALUATION ??

do you want to hear about this?

LME, CHINA LIFE

LME
why is it for sale? This is more of a strategic concern for UK as a whole, if it is tied up to Asia particularly china the exch would have a wider coverage and provide more opportunity for her citizens and investors, the move will also pre-empt any success of a local commodity exch being setup or tied up with other parties.

HKE (388)should lie low in her bid as they are more interested in tying up than thought.

China Life
Recent results of CL is telling you the Chinese economy is under stress or slowing down faster than expected. Why? Premium growth is closer to zero that means the public at large have less money for investment or insurance and corporations are either cutting staff or do not want to increase coverage, both situations are telling you the economy is not doing well.

ENTRY EXITS - 2

more entry criteria:

• AUD hitting 0.94
• CAD hitting 1.05
• rsi must be on rising trend for the instrument you are investing - whether stocks, commodities or fx.

EXITS [stop losses] will depend on the type of instruments, stocks - 7-12%, commodiities - 2-3% [losses could be substantial for commodities even for 2-3%], fx 0.8-1.2%. For profit taking, checkout this blog on strategies.

aim for a smaller bet as this is a tidal wave not a storm in a teacup as market may make the drop unbelievable to force fed to take further action on QE.

ENTRY EXITS

the market is trying to take recent events into her hands and push the fed to start QE3, so brace off a sharp decline.

many of you who are waiting on the sidelines would like to know when to get back in, here are some hints:

• texas crude [not brent] hitting 85-90 range, try 88
• china mobile hitting 80-83, try 82
• remember, do not throw in your full amount - try 30-40%

Stock Indexes

click on the picture for a large size view.

Check on the indexes and see if you can draw any conclusion from here.

Apple, Dow and Euro

Apple close:    565 -16   high 644
Dow            13038 -168 high 13359
Nasd             2956 -67   high 3134
S&P              1369 -22   high 1422

If you have been reading this blog or recieving updates, you know that the view is Apple will be topping out at least for a short while. Apple stock after today's crash is off its high by a wide margin now.

Earlier this blog already states that Dow's rally cannot be sustained as observed from the chart.

Dow's fall likely triggered by a number of factors:

• Europe may have a sea change of leaders soon with France leading the pact this weekend, Sarkosy will be gone by Monday - the reason is after some three years of economic set back, not only there is no hope of a recovery, but more austerity ahead. the public usually have patience for only a 2-3 year span to any leader's policy, if it is not improving, one will be gone.
• high oil prices - this factor has been around for long, then why now, because Dow is hitting close to a three year high and texas sweet is also close to a three year high, you cannot have high oil prices unless the economy is really doing ok, if it is caused by inflation [money printing] then it will soon backfire as food on the dining table and gasoline issues eventually will impact consumer spending in other areas since income is not catching up with inflation.
• weak demand in Europe will hit us corp profits - read this blog on europe's self inflicted problem.
• unemployment - might be as high as 14-15% in actual terms but dropped to an official rate of around 8% due to a lower labor participation rate
• treasury auctions piling up - a series of auction coming soon which would take interest off stocks.

watch out S&P 1360 - a very key level if broken can go down a few percentage points and more.

Most people do not understand Europe and many short EUR and got burned. The earlier fall of euro is probably a shift and rebalancing of portfolio by the super rich and some funds after which it is more or less determined by economic factors not sovereign debt issues like most media are telling. But euro will surely go lower and very low should Europe fall into three recessions in two years which is not an impossible scenario given work ethics are low and patience of european citizens wearing thin, any continuous social unrest in a key country can drag euro much lower.

A quick and drastic fall of euro could only happen when its citizens are selling them like when Hong kong encounters confidence crisis back in 1984.

No cental bank can defend their citizens selling her only currency, this has not happened yet in europe, so euro will only fall in line with economic factors not sovereign debt issues unless the euro zone is breaking up, then the situation will be her citizens losing confidence in their own currency.

Timing, Strategies

Timing

Some readers who received short updates to their mail boxes have asked about the timing issue.

So if you see a chart that is two three years in the making, any conclusions drawn suggest it wont happen overnight as it takes about 1/3 to ½ of the time for the trend to materialize.

On some occasions the call is for a much shorter period and then it does not suggest a continuation of the trend.

For example, my calls are below:

• 2012.1.19  - hsi will get above 21000 very shortly and will meet heavy resistance at 21600/800
• 2012.2.21  - options suggest hsi will go south towards 20000
• 2012.4.08 – Dow and A50 [2 year chart] rally will be difficult

Very shortly means it will get there in 10-15 business days, no continuation of trend.

Options in Hong Kong expire monthly thus it will take no longer than two months to get there, also no continuation of trend in this case.

A two year or more chart may take close to 1 year to materialize.

Strategies

Many of us have not formed basic strategies on entries and exits as well as stop loss and profit taking scenarios.

Most try to get lucky and purchase the whole lot at one tranche. Always ask yourself once the stock falls 7-12% from your average costs whether it is worth keeping them.

Entry - To protect your capital, always buy on dips and buy in tranches like 40% at an initial drop of 1000 points then 20% for each 500 points drop. This is a total drop of 2500 points to have accumulated 100% of your preferred stock. You can choose a 3000/4000 points or a wider horizon scenario.

Avoid buying at or close to top of a J curve.

By the same token, you should sell at or close to the top of a J curve

Exit – identify whether it is a big move upwards by looking at the chart first, if there is a well formed rounded bottom over 6 months or more, then you can wait for a 10% gain to sell 40% and another 20% for each 3-5% gain extra on top.

Some people preferred monthly or quarterly average buying, still the stock should not be like PCCW or some stocks that can decline 50% in a short while although it is difficult from the outset to know whether it will decline this much. Alertness to the macro environment at the time is necessary not to be in the wrong sectors. There are a number of factors or a checklist to be established over time to avoid undisciplined behavior.

Stocks Picking, Index Tracking Funds

Stocks Picking – Why losing

I have on many occasions explained in detail to friends that most of us aren’t able to really pick good stocks, maybe you get a few right and a few wrong but the net effect usually is unfavorable ie you sustain losses.

So why is this the case.

Now read below for some strategies that many fund managers engage for their daily portfolio management:

1. stock rotation in sector – buying a few strong players in a sector and then starting buying the weaker players, unload the weakest players first after a fast runup then the stronger players at the end
2. sector rotation – changing the theme industries from time to time based on macro views of the economy
3. zero hedge – buy one or two stronger players and short the rest, usually in a bear market
4. pair trading – buy one strong player, then stop buying and buy another strong player unloading those bought earlier, after a while reverse the trick.
5. valuation - when china is a hot pick, valuations can go for 25+ p.e., when it is out of favor, it is worth less than 10+ p.e., just a change in the perception of stock valuations can make major price differences.

If you do not understand the above or have never heard of it, then you are likely to lose your shirt on investments.

Most layman players do not have the time to run through all these and many buy on hunches, ie why when stocks tank, they stick to it and ran heavy losses. Another reason is they quit too early when the stocks are picking up and didnt earn enough profits to offset the losses.

Index Tracking Funds - Why is it worth

The easy way of investing is to buy indexed funds.

Many stock indexes are reviewed regularly and upgraded based on the market capitalization of each stock, if one loses too much of it's capitalization, it is thrown out of the index and a rising star brought in. There are many such cases both here locally  - PCCW, New World Developments and overseas - GM, Citibank, AIG

Never underestimate this self improving process, just ask yourself how many times have you reviewed your stock portfolio in the past and willing to throw out the bad apples. The reason you did not is because your portfolio is either skewed towards such mid cap stocks or too small so that throwing out the bad apple means heavy losses.

An index fund has the advantage of you are able to buy into with small sums but having the same edge as a large portfolio ie less concentration, therefore you wont be hit so hard with the bad apples.