A Long Writing Pause, Yet Timely Trading Action
4 Weeks Without Blog Update! Sorry...
I deliberately remained silent on market events during the always tricky Mercury Retrograde phase. After weeks of uncorrelated stock market movements - mostly of little importance, it is only now that we are seeing signs of investor sentiments turning and better evidence of changing prospects
In our ActiveManagement approach, we made changes on March 15 & 16, switching about 50% of equity holdings to safety. It is was a very selective process as the peak in prices was in large caps mainly, with small and micro caps still on a trajectory for higher highs. The proceeds of our profit taking exercise were used to buy mostly US bonds, AA+ and better, and globally diversified bonds, which in the past tended to be inversely correlated to stocks.
We could have done a bit more: tech stocks continued to rise, and single country funds like Thailand and Philippines. But the risks would have been much higher and - the final turn is in sight. With one more bounce into late April we think that more persistent down pressures are likely to ensue, so our cycle research indicates. That is when we may need to take profit in our remaining small cap positions, and even our Malaysian and Japanese equities will need to be 'ring fenced'. Put simply, we switch even more to safety.
Early signs that our assessment has proved correct:
GOLD & GLOBAL RESOURCES
Our warnings of falling gold prices, first published late last year, are vindicated. That has not stopped the gold traders to market their ware with promises of much higher prices in the future. Possible. We, however, prefer to wait out the current correctional trend. When do we see the bottom coming? Cyclically, we might be rather close in terms of time. Price-wise I hope to see a further decline into the USD 1500-range for confirmation. Only then do I consider the risk-reward relationship 'very favourable'.
Gold funds (the ones that we access here) are seeing the largest losses of late, many into double digits since we called for the exit. Please take note that actual prices in SGD for funds are sharply lower than gold prices in SGD. That was always the added danger when dealing with gold stocks.
Foreign Currencies versus SGD
a) The USD on Trade-Weighted Basis
Since the low in November, the USD (on a trade weighted basis) has had a picture-book rally when viewed through Fibonacci measuring tools: from low to high hitting the peak at around 0.81 as expected, the levels of retracement have provided a superb structure and even the Fibonacci time lines fit the moves to perfection. The subsequent retracement of exactly 50% of the rise from January 12 to February 29 took 48 days, exactly two thirds of the time the rally took from start to finish.
We are now moving in the relative tranquillity, envisaged by the supporters of the USD (see the central bank agreement from September 2011) as against historical volatility of currency movements. Trading ranges between currencies have become much narrower and - predictable for a change for reluctant currency observers like myself.
b) The SGD vis-a-vis USD and JPY
This chart is a short term view of the SGD in relation to the USD and the Japanese Yen. The green oval indicates the time when our portfolios switched into USD and USD denominated bonds. In the chart above, the timing appears ideal (see white arrow square in trade weighted USD chart above) but in SGD terms the time is merely ok. Our bond funds though show a small profit as of Wednesday, April 4th. The last two days of a rising USD will only appear in the portfolio on Monday or even Tuesday next week, due to the Easter bank holidays.
The chart also shows why it was perfectly ok to keep our equity holdings in Japan, purely on the basis of a strengthening Yen.
For both currencies, I expect more strength to emerge in the coming weeks and - months. Hence the positions we have taken are for the medium term, quite obviously in a positive trend.
Stock Markets
Stocks and shares are far less straightforward in their trend assessment. Optically, the advance since October is supported by the Fibonacci fan structure and some previous retracement levels. These also suggest that their is still ample upside. But a break in the final line of the 'fan' suggests that a continuation now is dependent on the level of punter participation. Will lavish liquidity and - increasing impatience on the part of bond investors over the lack of opportunities seal the fate of the bears? Will the rally continue?
The NASDAQ 100 is an even more bullish example. With a return of some 35% since October it outperformed the large cap oriented DJIA (23%) by almost 50%! Of course, to a large extend this can be attributed to the sterling performance of APPLE, (AAPL +50%), which carry the largest weight in the index. But does it mean that it runs a greater risk of deteriorating now?
Valuations in Asian indices like the Hang Seng in Hong Kong, Sensex of India and - also the All Ordinaries of Australia have been beaten down excessively by comparison. How much more downside could we possibly expect to see in these indices?
While I continue to watch out for signs of deterioration in the coming weeks, actual downside may be limited when so much money is still on the 'sidelines' waiting for an opportunity to buy, so much liquidity still readily available to global banks at almost 0% interest. I also see more positive aspects in the US economy, Latin America and am even less concerned for Asian economies. To liberally quote one prominent observer on the state of the Chinese economy:
Unless a more serious deterioration is evolving, I propose to stay the course with our already lowered equity exposure, and even make an effort to rebuild from lower lows when they arise in the current second quarter.
Be cautious by all means, but don't show the sticky finger to presentable opportunities. No '2008' scenario in sight!
I deliberately remained silent on market events during the always tricky Mercury Retrograde phase. After weeks of uncorrelated stock market movements - mostly of little importance, it is only now that we are seeing signs of investor sentiments turning and better evidence of changing prospects
In our ActiveManagement approach, we made changes on March 15 & 16, switching about 50% of equity holdings to safety. It is was a very selective process as the peak in prices was in large caps mainly, with small and micro caps still on a trajectory for higher highs. The proceeds of our profit taking exercise were used to buy mostly US bonds, AA+ and better, and globally diversified bonds, which in the past tended to be inversely correlated to stocks.
We could have done a bit more: tech stocks continued to rise, and single country funds like Thailand and Philippines. But the risks would have been much higher and - the final turn is in sight. With one more bounce into late April we think that more persistent down pressures are likely to ensue, so our cycle research indicates. That is when we may need to take profit in our remaining small cap positions, and even our Malaysian and Japanese equities will need to be 'ring fenced'. Put simply, we switch even more to safety.
Early signs that our assessment has proved correct:
GOLD & GLOBAL RESOURCES
 |
| GOLD PRICES from the peak in Aug 2011 to the low in ..? |
Gold funds (the ones that we access here) are seeing the largest losses of late, many into double digits since we called for the exit. Please take note that actual prices in SGD for funds are sharply lower than gold prices in SGD. That was always the added danger when dealing with gold stocks.
Foreign Currencies versus SGD
a) The USD on Trade-Weighted Basis
 |
| Picture-Perfect USD movement in Fibonacci terms |
We are now moving in the relative tranquillity, envisaged by the supporters of the USD (see the central bank agreement from September 2011) as against historical volatility of currency movements. Trading ranges between currencies have become much narrower and - predictable for a change for reluctant currency observers like myself.
b) The SGD vis-a-vis USD and JPYThis chart is a short term view of the SGD in relation to the USD and the Japanese Yen. The green oval indicates the time when our portfolios switched into USD and USD denominated bonds. In the chart above, the timing appears ideal (see white arrow square in trade weighted USD chart above) but in SGD terms the time is merely ok. Our bond funds though show a small profit as of Wednesday, April 4th. The last two days of a rising USD will only appear in the portfolio on Monday or even Tuesday next week, due to the Easter bank holidays.
The chart also shows why it was perfectly ok to keep our equity holdings in Japan, purely on the basis of a strengthening Yen.
For both currencies, I expect more strength to emerge in the coming weeks and - months. Hence the positions we have taken are for the medium term, quite obviously in a positive trend.
Stock Markets
 |
| S&P500 since October 2011 till early April 2012 |
 |
| NASDAQ 100 - outperforming S&P 500 again. |
Valuations in Asian indices like the Hang Seng in Hong Kong, Sensex of India and - also the All Ordinaries of Australia have been beaten down excessively by comparison. How much more downside could we possibly expect to see in these indices?
While I continue to watch out for signs of deterioration in the coming weeks, actual downside may be limited when so much money is still on the 'sidelines' waiting for an opportunity to buy, so much liquidity still readily available to global banks at almost 0% interest. I also see more positive aspects in the US economy, Latin America and am even less concerned for Asian economies. To liberally quote one prominent observer on the state of the Chinese economy:
"...it is less a question of a hard or soft landing in China, - it is ;business as usual' and any fallout will be managed accordingly".Frankly, at the current levels of 'A' shares, the invitation from the Chinese government for more foreign investment into Chinese company stocks and bonds, the downside is certainly very limited, - and the upside will more likely surprise.
Unless a more serious deterioration is evolving, I propose to stay the course with our already lowered equity exposure, and even make an effort to rebuild from lower lows when they arise in the current second quarter.
Be cautious by all means, but don't show the sticky finger to presentable opportunities. No '2008' scenario in sight!
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