Investment Strategies To Beat The Market

I started this blog with the premise to inform other fellow investors out there on how to stay ahead of market cycles. To me, investment strategy should be making sound estimation of market direction ahead of the all the news and crap you hear and read about. Because reacting to news is often too late.
Today's entry is very important to me because i try to understand why the market is reacting in certain ways and why the next big crash is constantly being delayed through manipulation by central banks around the world economic powers.

The graph above clearly shows S&P movement from March'09, as it moves up in steps every time a new Quantitative Easing is introduced. Naturally this is not healthy because of the external influence QE has on the market. And we are left with conflicting data, S&P should not be so high when we still have alot of companies with reduced PE ratios, earnings and growth decline.

If you are looking for value, Europe seems to be a better option than US and Japan. Europe is more than 15% cheaper then US in terms of its P/E ratio (EURO STOXX 50-15.57 , S&P 500 - 18.43) giving it room for higher profit. 
Japanese market on the other hand, i personally will avoid because the monetary policy implemented will result in higher volatility (plus i dont really have the extra cash to gamble away). 

In these kind of scenarios with external influences, technical analysis becomes inaccurate and unreliable in my opinion. However one can still gear their investment strategy to pick the best sectors that perform well during late stages in a bull market. I need to pull up my favourite picture below which explains market cycles and recommendations:

I follow this graph very closely. We are in the late bull stages in the stock market cycle. For very good reason, there is no timeline on the x-axis because stock market cycle time can vary due to different influences. At this point of time i strongly recommend holding onto non-cyclicals defensive stocks such as utilities, consumer and healthcare. 
Keep your eye on opportunities in cyclical stocks such as in the luxury goods, tech stocks and financials but dont buy them yet, wait till late bear market stages. 

Dividend investing is always nice to have, keeping at least 30-40% of your portfolio based on regular dividend paying stocks is a strategy i adopt but keep a look out for dividend cuts, cancellations or script dividends.

To summarise, it seems the US market is already quite high, it would have to go to higher highs before the next market crash. This does not mean we should start worrying and panicking. The key thing would be to take profit where targets are reached, not to be greedy and keep at least 40% of your portfolio in cash by end of the late bull run. (Frankly no one knows when that might be, could be end of 2013 or could be after 1st Quarter of 2014) 

Being diversified is not a bad thing, or is it?

Sometime i wonder if being too diversified is a bad thing? The biggest fear is not being able to react quickly enough to a global crisis like the one we experienced not too long ago. In the event of a market crash, i hope to reduce all exposure to US, Japan and HK and 50% of SG. Meanwhile it would be unwise to take advantage of the wonderful opportunity presented to us living in Singapore, the opportunity to play almost any market in the world. What is your exposure level to world markets?

















 

I also analysed my investments in terms of sectors, the graph is below. I usually pay more attention to sectors because of the fact that certain sectors perform better during certain times of the year and during market cycles. You will notice that my exposure to commodities sector is minimal and i would keep it under 10%. I realise my exposure to REITs is 30% but i am not worried because they are mainly hospitality REITs for example Ascott and FarEast. I would be worried if REITs which are overvalued, for example FIRST REIT, K-REIT or CMA. All in all, I am gearing towards defensive stocks more hence my exposure to Consumer and Life Insurance sector. Which sectors should i get out of by end of this year? Definitely Oil & Gas, Commodities, Utilities and Manufacturing.





 

Impact of Quantitave Easing till 2014

If we want to stay ahead of market cycle, very important to keep up to date with latest news. I was just reading this morning that US Federal Reserve might slow the pace of debt purchases designed to boost economic growth before 4th quarter. It seems that FED won't start to reduce their $85 Billion monthly bond buying until the last 3 months of 2013, they might end it in mid 2014 or later. 

The "wise" Fed chairman Ben Bernanke supposedly an expert in Great Depression, has pumped more than $2.5 trillion into the economy for two main reasons: Employment & Price Stability. Maybe i am a critic, i do not think pumping money has created more jobs. In fact, it is delaying the inevitable recession, creating asset price bubbles along the way. What is the benefit of this stimulus anyway? The US has a sluggish economy, unemployment in March was @ 7.6%. 

I am convinced this easing policy creates serious risks to the financial system over the long term, it is kind of putting me off because my previous estimation of when a recession is coming might be delayed further. However i do understand (to certain extent) why Bernanke has taken such actions, the US economy would have been in much worse shape if the Fed did not interfere (thats a fact), but many things have been standing in the way, limiting the impact of the monetary easing going forward.

What are the implications? What to look for?
Whether we like it or not, Singapore and the rest of the world is tied to what happens in the US. The economy is very interest-rate sensitive, so if the Fed cuts support too early, the market will over-react and we would see a spike in yields and we're back to slower growth. Majority of Fed officials anticipate raising interest rate until after 2015 as unemployment dives below 6.5% (thats is their prediction).

Number to look at: Interest rate will rise as soon as unemployment is below 6.5%, inflation is 2.5% average or less. General consensus is this will only happen mid 2014 to early 2015...!

What does it mean for our investment strategy? 
Those of us owning a home: Stick to your Sibor-pegged home loan till interest rates start going up, then refinance to fixed-rate to lock in a lower interest rate.
Those holding onto securities: prepare for short term pull-back, followed by another massive bull-run till Feds pull out of easing policy.  

Disclaimer: Please seek proper advice as to your investment strategy, perform your own due dilligence before investing. The above mentioned in article are just my take on the economy, others may differ in their opinion.
 

Short-Term Uncertainty

I believe we are now entering uncertain territory. Last night, S&P broke to higher levels by taking out its prior all-time intraday high. Same goes for NASDAQ Composite and S&P Financial Sector which made new bull market highs. (these were the two areas underperforming recently). All this means that previous highs are theoretically now act as support. (Resistance turn support). 

From here onwards, its uncertain how long the bull market will last. When will major counters start getting haircuts. I will DEFINITELY anticipate a reversal soon enough, so it is time to "Sell In May, and Go Away".

Market Direction Mar'2013

Nobody can tell which way market is going to head in the future but one can make reasonable judgements. Investors usually have a general idea which way market is headed like during a bear or bull market trend. But its fascinating to observe what "financial experts" are saying on TV, writing on major news websites and what bloggers are writing about. It gets really interesting when we reach changing point in market direction, in my opinion, majority of analysts on TV state too little too late. If you are forming your opinions on market direction and reacting to news on a daily basis, you are probably guaranteed to get caught up in a trade you regret making. 

March Market Update:

No doubt, US market has had a great run from mid 2012 till now. China stocks have climbed as must as they can, now going through a healthy correction. Singapore market is at very healthy levels but needs to go through minor consolidation before it can move higher. 

Wall street rose again last night. But i am worried. In fact whenever I see penny stocks in Singapore and US being hyped up, time to be a little careful. Its true what Warren Buffett once said : "Be Fearful when other are Greedy". 

I also get very worried when Jim Rogers start showing up on the radar again, nothing against him personally. The situation in Cyprus is just a distraction, nothing else.

How can we tell if market it going to change direction? What are the indicators? Here is a few:

1. Penny stocks will start flying

2. Jim Rogers start appearing on every show

3. Put Warrants/Options become popular

4. When Motley Fool publishes articles like "America's next boom"

Of course in all seriousness, I don't actually think we have reached a turning point in the market now. Good News is that: Most companies in US are at healthy P/E ratios, expenditures and jobs are being cut, earnings estimates are within reach, its mostly looking good but it is creating a complex situation which kind of throws me off balance.

Anyway you should be alright if you make investments based on valuation, shift money to companies that do well in bear markets. It is inevitable that market will lose steam, change direction and head lower, the million dollar question is WHEN?     

Market Cycles

Actually there are many cycle theories, Economic/Business Cycle, Market Cycle, Presidential Cycle, holiday cycle and so on. To me, stock market and the economy moves in tandem and it is the most relevant to investors today.

According to Investopedia, Market Cycle is defined as "Trends or patterns that may exist in a given market environment, allowing some securities or asset classes to outperform other". Everything in nature has a pattern, even man-made financial systems have a pattern. I would recommend the movie "Pi" for anyone interested to learn more about patterns in man-made systems and how they display similarity to nature. A very weird but interesting movie.

Getting back to the topic, the phenomenon of market cycles exist and we as investors should take advantage of it as much as we can. Its actually quite hard to pin-point exactly what stage we are in the market cycle because of the lack of specificity. There is no specific beginning or ending to a phase. However, as with most market professionals, I agree they exist and our Investment Strategy should include short to medium term swings within the cycle.






















The big question is: Where are we in the market cycle???
Well that depends on your own interpretations, you might disagree with the following. In my opinion we are in the Late Bull phase in the stock market cycle, which also corresponds to the middle of economic recovery. I am expecting a peak in Gold and commodities by 2015 but this bubble is not sustainable. It will eventually burst sometime in 2015 when we are in the middle of a recession.

Inflation and central bank interventions through monetary policy easing has actually distorted the market cycle and skewed my previous predictions. In fact, I initially anticipated a recession starting 2nd Quarter of 2013 and have made preparations for it already (by taking profits and having ready cash). Now it looks like it will be 6-12months before we get into a bear market.


Forget what investement bank guru's are telling you, they have a reputation of telling you things a little too late. It is better for you to decide for yourself. Where do you think we are in the market cycle?