Current Market Situation, from an ex-colleague

I have a special contribution today from my ex-colleague, Song Koon, who has been trading/investing full time for about 3 years.  Here is his reading of the current market with some minor edits from me:

"The weather is getting hot and so is the market. I guess those who have positioned themselves in Dec and early Jan are having a roaring good time.
The bull is real, keep cheonging, with more and more positive news and earnings. There is also Jan effect and end of month window dressings. Although minor pull-backs are expected, all the major crisis have been kicked down the road beyond middle of March. With still low valuation and regional play such as emerging Myanmar and China recovery, there is still lots of stamina going forward for Feb and early Mar. Just remember sell in May and go away, which I find holding true time and again
For STI, the upside is getting compressed. However, penny stocks with potential expansion in emerging markets seem having good time, especially those cash rich and having good fundamentals.
What's important now is that the stock picks in your portfolio are rising due to strong fundamentals, good earnings and giving regular high yield.  Apart from this, it is highly recommended to watch the news of stocks in your portfolio. Remember to take profit along the way, leaving some stocks to extend their run to juice the final drop."

Possible Retracement for Shanghai Index

If anyone is looking to invest in China related stocks, I suggest that waiting for Shanghai to complete its retracement first.  Lets look at the weekly chart of Shanghai index.  I am assuming that today's closing of Shanghai to be lower than today's open.

Shanghai is likely to form a bearish weekly candle today.  This may signal a short term retracement. From the chart, it is clear that the long term trend is still down.  Shanghai needs to break above 2330 convincingly, to assure me that the trend may be changing.  Even then, the uptrend may not take place immediately.  The most likely scenario is for it to establish a trading range first, before breaking above 2656 to start its uptrend.
How does this affect me?  I will wait for it to complete its retracement, or break above 2330 before investing in China related Singapore stocks.

S&P 500 making new 5 year highs

I realized that updating my blog is not easy. It is taking time from my actual trading.  Analyzing the markets for opportunities also takes time.
There are two major news recently:

• S&P 500 made a new 5 year high (This ties in with the current level of VIX)
• Japanese government intervention in financial markets.

I am long in both Singapore and US equities.  As some may already know, I am a subsriber to VectorVest.  There are plenty of tools in Vectorvest.  One of my favorite for long term trading is called "Confirned Calls".

This is a daily chart of the arithmetic average of 7951 US Stocks.  I feel that it gives a slightly more accurate picture of the US market than the Dow, Nasdaq or the S&P500.  The green and red arrows are the "Confirmed Calls".  This is a long term trend following system.  It helps me to plan my trades based on the long term direction.  Notice that the US market has broken out of the resistance and is making new highs.

In the same way, above is a daily chart of the arithmetic average of 756 Singapore Stocks.  I am still holding on to my portfolio and is in fact looking to add to my positions.
The above 2 charts are perfect examples of prices making higher highs and higher lows.  As the saying goes:
"The trend is your friend until it ends".
The US market is heading towards it 6 year highs, while the Singapore market is heading towards its 3 year highs.  While my direction is still up, but I will be very cautious with my positions, taking profits with trailing stops.  No shorts for the time being.

For those who are unaware, there has been a fundamental change in the Japanese financial markets.  This can be clearly seen in the weekly charts of the Nikkei and the USD/YEN.

DollarYen has broken out of the classic head and shoulders neckline.  With the Yen weakening, the export oriented Japanese market should get a much needed boost.

The Nikkei has been on downtrend for decades.  It has now clearly broken out of the downtrend channel.  If the Japanese economy indeed rises, will it help to drive the Asian economy?

Good Investment - OCBC Preference Shares

OCBC 5.1% NCPS is a good investment at its current price. It is suitable for investors who want to beat inflation and the current pathetic bank's interest rates.  At yesterday's closing price of S$102.5, I have calculated the YTM (yield to maturity) to be 4.66%.  This means that of you invest S$102.5 in this preference share, and hold it till maturity on 20 Sept 2018, you will earn for yourself 4.66% annually.

I have about half of my savings invested in strong singapore preference shares and bonds.  I like to invest in this asset class for the following reasons:

1. Stable returns - Bonds have outperformed the equity market since 1997. (See above)
2. No currency risk - Strong Sing dollar
3. Little credit risk - Well managed economy with strong corporate governance
4. Better yields than savings and fixed deposits
5. Reasonable yields compared with property yield without hassles, fees.

Note : This is not a trade for capital gains.  It is a long term investment for fixed income gains.

If you like to get know more about corporate bonds and preference shares, drop me a line.  I will be happy to share what I know, I have nothing to gain and I will not be selling you anything!

The VIX (CBOE Options Volatility Index)

I am not smarter than the market.  I am not Warren Buffet.  I am just an ordinary person like most of you.  I did not go to business school, or work in Raffles Place.  As an american investor, Martin Zweig, once said:
"I measure what is going on, and I adapt to it.  I try to put my ego out of the way.  The market is smarter than I am, so I bend."

To know what is happening in the financial world, most people read financial news, investment magazines, newsletters, financial shows.  I am not discouraging this.  But I feel that they transmit market hype.  These spin stories are very misleading if you read it at face value.  It is very important to come to your own conclusions.  There are however, ways to measure objectively what exactly is the sentiment at ground zero level.

Practically every major indices such as S&P and STI is hitting resistance.  Most of them shows bearish divergence - meaning price is going up while technical indicators are coming down - indicating likely retracement.  But will there be a change in direction?
No one can determine exactly when or where the market will change direction.  However, it is possible to determine if the market is healthy or sickly.
I like to use the VIX as a confirmation of what the market is doing.  I do not use it to predict the direction.  The definition and charts of VIX can be found in www.cboe.com
Currently, the market is moving up, and I would like to know if the VIX confirms this upside move.
VIX measures the expectations of options traders of stocks traded on the NYSE and Nasdaq.  It is frequently called the Fear Index.  It moves inversely with the market.  I have 2 horizontal lines drawn.  At 49, and at 20. This is the monthly VIX chart over the past 10 years.  Circled are the years 2005, 2006, and 2013.

Currently, the VIX is as low as it has ever been for a long time.  I interprete this to mean that the level of fear in the market is now very low.  As long as it stays low, my bias is upside.  The last time the VIX was this low was in the years 2005, and 2006, where the stock market crept up to approach the 2007 highs.  See S&P monthly chart below.

Remember, VIX is used as a confirmation of direction.  I do not use it to predict.  From my experience, the VIX is more reactive than predictive in nature.  It simply tells me the level of fear sentiment at the ground zero.
Is the market going to do the same - to continue creeping up to its previous highs?

Portfolio increased by 6.8% since 1 Dec.

On Monday 14 Jan 2013, I sold all my property stocks, most of them at the opening price.  The reason for exiting these was due to the government new rules on property.  These exits were not part of my original trading plan.  However, the risks in trading property stocks are known in advance.  I knew the industry risks involved when I bought the stocks in beginning Dec.  It was a matter of time that our government stepped in to further cool the property market.  I knew I had to be fast in exiting in exceptional circumstances.  The stocks sold were

• Ho Bee
• Far East Orchard
• Bukit Sembawang
• KepLand
• Wing Tai
• Guocoland

Below is a chart of FTSE Real Estate.  The green arrow was my entry beginning Dec.  I did not buy at the low, nor did I sell at the high.  But I did get quite a bit of the chunk in the middle.

Yesterday, SuperGroup hit my cut loss level of 10%.  Today, I got out at $2.95.  SuperGroup is a strong company based on its fundamentals.  However, I always trade according to my written trading plan.  As the saying goes "If you fail to plan, you plan to fail".
My portfolio strategy calls for buying the strongest stocks in Singapore.  A stock that drops 10% relative to other stocks is no longer a strong stock.  Thus, it should be sold.  My measurement of trading success is the portfolio gain or loss.  Not any single individual stock performance.

I am pleased to report that since the 1st Dec, my portfolio  is now up 6.8%.
What is my current plan?  For sure, in the next couple of months, I think the direction is still up.  For the next few blog updates, I shall share my reasons, beginning with the VIX.

Making Difficult Decisions

I apologise for not been updating my blog as my mind has been on chess.  I have been meeting friends from the chess community, researching the current chess scene from the internet, watching chess internet videos, and just reading lots of websites of chess players and coaches.  I was also in a reflecting mood for most of this week.

More than 20 years ago, I had the fortune of being trained by Soviet Chess Grandmaster Eduard Gufeld (http://en.wikipedia.org/wiki/Eduard_Gufeld).  He has since passed away.  I was then already representing Singapore, but up till this day, I will always remember and am grateful to him for his influence on my chess and on my life.  I am quite unsure if he actually improved my playing strength, but I am very sure his impact on me went beyond the boundaries of chess.  Much what I learnt from him was on principles of engaging an enemy, and the human decision making process.

Tomorrow, Monday, I will be selling on the opening bell, the following stocks that I am holding.  These stocks are very much in the property sector:
Ho Bee
Far East Orchard
Wing Tai
Kepland
Bukit Sembawang
Guocoland

Of the batch of stocks that I bought in end Nov/early Dec, I will be holding on to only:
Semb Corp
OCBC
SuperGroup
Ezion
Tat Hong

When I bought these stocks in end Nov, the plan then was to get out only when  one the the following scenarios take place:
1) Stop Loss of 10% or
2) Profit target of 50% or
3) Profit taking when the market turns down based on charts

However, look at the front page news on Saturday.

I am unsure whether measures will dampen the market in the short term, or in the long term.  Admittedly, I can feel the emotions of greed and fear.  What if I sell and they continue to go up?  What if I hold and they slam down?

Should I still stick to my original plan, or take profit based on news, which was not in my original plans?

One of the rules of decision making that GM Gufeld taught me was this:
"If you opponent makes a move that is unexpected that do not follow classical rules, you may either reply a move that is based on classical rules, or you may react in kind and make an unexpected move that do not make follow classical rules."

After thinking through, my response to our government's move is to deviate from my original plan, and to get out immediately.  The new plan now is to try to enter again later at a lower price, but it depends very much on what my opponent/market is going to do. One thing I know, however, is that when I do choose to enter again, there may be better and stronger stocks to invest than the above stocks.

There is no love between me and my stocks.  They are just my chess pieces.  They can be sacrificed and traded for something better.  The objective is to win in the long run.

Is beating the market as easy as it sounds?

A chess board has 8 by 8 squares, while there are just 6 different kinds of "soldiers".  Yet, after hundreds of years of thought by the smartest players in this world, there is not a single sure way to play.  There are no best styles or best strategy.  There are no sure-fire recipe to success.

If we cannot forecast accurately the course of a simple chess game, what makes some people think that they can do it for something as complex as the financial markets with millions of participants instead of just 2 players?

Look at the books and courses that are being sold.  You will see some preaching value investing, right next to one insisting on price action.  There are manuals on asset allocation and portfolio management.  Here is one demanding that their trend following system surely works and that you only need to spend 2 hours a day.  Another one saying its easy to turn $1,000 to $72,000.  Some call for trading futures intra-day as a source of income, while some advise long term investing in high yield instruments.

The usual formula is this.  Follow the methods of author or trainer, and you will achieve similar success.  This is a fundamentally flawed methodology, because thousands of other traders and investors has tried to follow and lost money.  They forget that the market is not dead, it is alive.  As in chess, you make a move, and someone is there playing the Black pieces.  When you enter into a trade, thousands of people are reacting to your entry.  And a strategy that worked in the past may not always work again in the future.

Attend their seminars or read their books, many of them are very impressive and persuasive.  Apparently, each of these contradictory formulas is the key to success.  And some people believe it!  Err, I was one of them.  Now I know better.

Why I prefer to trade Ordinary Stocks

Many people have asked me what I trade.  I have traded ordinary stocks, CFDs, index futures, forex futures, spot forex, and even commodity futures. I am vested in bonds, ETFs, and ordinary stocks.
What is my preferred instrument? Well, Spot Forex is sexy and cool.  Everyone seems to be trading it.  Index Futures is the most volatile, and the fastest, and it is here that I have my biggest gains and losses in a single day/hour/minute.
Although I see trade all of the above, my preferred instrument is actually the plain old ordinary stocks.  Compared to forex and equity indices, the "boring" stocks offers me the following advantages, which forex and indices do not have.

1. It is possible to determine the fair value of each stock.  Most people call it intrinsic value.  From this value, I will know subjectively what my stock is worth.  It is very much more difficult to determine the value of a currency.
2. It is possible to quantitatively determine the relative safety and growth potential of each stock.  To determine how safe is your stock, there are plenty of financial ratios to select from.  How do I quantitatively gauge the growth potential and safety of a currency?
3. My preferred trading method is trend following.  It is much, much, and much easier to find trending stocks as there are thousands of stocks to choose from.  Compare the number of stocks in this world to the number of currencies.  Which currency pair is now trending on the daily chart?
4. Human nature, emotions of greed, fear, hope, ignorance, are more evident in the stock market.  The stock market has plenty of investors.  These investors are mainly uni-directional, they buy only.  This makes the stock market to be mainly influenced by human nature, human opinions, and expectation of future profit potential.  With regards to forex, because they trade in pairs, human emotions in forex trading is bi-directional.  It is not clear at all which direction is there more greed, or fear.  (Forex and index traders like to use "risk on/off" to determine the sentiment of the market.)

The above 4 points are very much part of my considerations when I trade stocks.  With due respect to my fellow traders, I humbly think that these 4 "tools" gives me an edge over my competitors in the market.

In my humble opinion, the most important is point 4 - the human nature.  Gauging the sentiment of traders allows me to decide which strategy to use: to follow the trend, or to be a contrarian.  I believe that mastering the human nature element separates the minority of people who are successful, and the vast majority of unsuccessful traders.

Personality Plays

The following is actually from my broker.  I thought that it is an interesting list of local personalities of the rich.  I have put it up here to share with you.

Personality plays : 

1. Peter Lim : Rowsley, UPP & Informatic 
2. Jim Rogers : Geo Energy, took up Olam rights offer on dec 28
3. Sam Gooi : GSH; formerly was JEL, recently proposed acquisition of ChongQing based property development Etika; Tee Yih Jia (Sam Gooi) took 75m new shares placement @ 0.2132 on Dec 26
4. OOI Hong Leong : IPC corp
5. Chew Hua Seng : Raffles Education
6. Chew Hua Kwang : Midas
7. Stephen Riady : Lippo & OUE
8. Francis Yeoh : Starhill Global 
9. Henry Ng & family : Pan United
10. Koh Wee Meng & Koh Wee Seng: Fragrance group, GP Hotel, Aspial, Maxi-cash
11. Kuok Khoon hong: Wilmar
12. Quek Leng Chan: Guocoland & Guocoleisure
13. Kwek Leng Beng (Quek Leng Chan's cousin) : City Development

One way to use it is to buying up the laggards when the driver stock moves.  For example, Peter Lim's Rowsley often is the first the move.  When it moves in large volume, buy up UPP and Informatics.  Very often, UPP and Informatics will subsequently move.
Disclaimer: I do not trade this way as it is not my style.  It would also mean the full time trader has to be alert and staring at the screen the whole day and every day.

Outperforming the STI

About 1 month ago, I longed a basket of 11 stocks.  Read 1st Post and 2nd Post for the entries.  There was an update about 2 weeks ago Update.

I am underwater for 3 of my stocks.  The truth is that I am slightly disappointed.  I like the fundamentals of these 3 stocks.  If you have followed my calls, apologies.

• Tat Hong,     down -1.64%
• SuperGroup, down -1.70%
• GuoccoLand down -1.85%

However, I am, very pleased to report that as a portfolio of 11 stocks, I am up........9%.  Not bad for a month's holdings, huh?  This time round, my percentage of picking winning stocks is more than 70%. ( if I sell the entire portfolio today ;-)

In spite of the above positive results, what pleases me most is that the re-affirmation of the strategy of trading a portfolio.
For example, the outstanding performers are:

• Far East Orchard,   up 23.77%
• Ho Bee,                  up 19.77%
• Ezion,                     up 16.32%
• Bukit Sembawang, up 13%
• Keppel Land,         up 12%

Of course one can argue that if I had put all my money on Far East Orchard, I would be up 23.77% instead of 9%.  But this is on benefit of hindsight.  Do I know on 3rd Dec 2012, which stock would be going up?  What if I put all my money on Guoccoland?

As my own fund manager, one of my objectives is to outperform the STI..  Did this portfolio outperform the STI during this time period?  I am very pleased to report........a resounding YES.  The STI grew only 3.7% during this period.  But be warned that my portfolio is very heavily weighted towards the Real Estate Industry.

Diversification, or spreading the risk, is a good strategy  to increase expectancy of my trades.  In the long run, the probability of winning consistently is increased.

2013 : To be Disciplined

I want to be disciplined in 2013 in my trading.  How do I measure discipline and how do I increase it?  I think one the ways is to keep good trading records.

Traders look at charts, but I feel that it is more important to look at myself, as personality is very important to trading.  I believe that when I analyse my trading records, I will improve myself.  This is very similar to Chess.  When I was a serious chess player, I analyzed a lot of my own games, especially my losses, as I believe that it helps to improve my play more than analyzing other peoples' games.

According to Alexander Elder, there are 5 types of records that a trader needs.  

1. Trade Spreadsheet

I have a spreadsheet that list all my trades, including entries and exits, profits/losses, commission paid etc.  I plan to add columns to grade each entry, each exit, and each trade.

2. Portfolio Spreadsheet

Portfolio curve tracks each portfolio that I have.  Measures the % gains/losses, % winners/loses, % annualized rate of returns, % maximum drawdowns.  I already keep this, but I have to be more diligent to review it.

3 Equity Curve

Equity curve tracks the account equity, and monthly, quarterly, and yearly.  Again, the tough part is to keep updating and reviewing.  

4. Trading Diary

Visual and written records of trades, noting reasons for entering the trade, feelings, and unusual factors.  I started this some time ago, but have since stopped.  I must be more diligent to record and review past trades.

5. Weekly Action Plan

An excel to record trading opportunities so as to know each new day, how I will trade.  Very important for me to be organized so as to be ready for any new opportunity.

That's it.  My main focus in 2013 is to be disciplined to keep good trading records and to review them regularly.  Any other accomplishment will be secondary.  I quote Alexander Elder in the book "Trading for a Living", 'a person with good trading records is either a successful trader or soon became one.'