Wednesday, February 18, 2009

Stock markets - medium term trends

I blogged here exactly one month ago on January 18 about where I see international equity markets going in the next 3-12 months. I concluded then that..

"So in summary, the all the balance of probabilities is for more downside in stock markets all over the world for at least the next 6 months and possibly considerably longer.In a word if you're a trader - short . If you're an investor I would dump companies that have a lot of debt (even if prices are fire sale it's better than holding on while they go bust) and stay away from the banks and finance companies, commercial property and builders that are directly exposed to the largest problem areas. Personally I'm short the SP500 index in the US and 85% cash and only 15 % invested in stocks in (this is my primary home market Australia). Most of these stocks are held based on a strategy of buying stocks that are trading at a 30% plus discount to their marked-to-market net asset value (a Buffet type strategy) and have no debt. Generally I try to to be 90% invested in the stock market so here actions speak louder than words."

So how are things panning out?

Let's look at some major countries equity markets performances over the last month since I posted.
1. US - SP500 - down 8%
2. Germany - DAX - down 1%
3. UK - FTSE100 - Down 5%
4. France - CAC40 - down 1%
5. Japan - Nikki 225 - Down 10%
5. Australia - my home market - flat

So basically being short the SP500 has been a good choice the US has been one of the weakest big markets over the period. Not being heavily in the Australian market hasn't hurt me. I've made a little money on short term trades there with minimum risk. I'm now down to 10% invested in the Australian market after closing out some fundamental trades that aren't going anywhere anytime soon. There was a small rally in early February in most markets but this has died now.

Also the areas I identified as having most downside - builders, banks, other financials, commercial property - all down significantly more than the index in the US and here in Australia. Not sure about elsewhere but guess it would be similar.

So have there been any significant changes in the 9 factors I looked at in January? Not many. Taxpayers money still being put into stimulus packages or associated bailouts. Economic news still gloomy and getting gloomier - particularly in terms of contractions in international trade. Prices still too high compared with earnings and asset values, long term technical trends clearly still down etc. Possibly the one thing that appears to be changing is that the US market is not rallying as hard on stimulus and bailout plans - the faith in magic fixes is waning. As that was the main source of positive short term moves in the market that tends to make the case for being short stronger.

The one real change has been the strength of gold stocks. This bares watching both as a trading
opportunity and as an indication of the loss of confidence in US treasures as a safe haven or due to inflation fears based on government debt and the desire to inflate it away in the future. So far I have only traded gold stocks short term. However if gold gets past strong resistance at US $1000 I plan to buy gold stocks and look to short US treasuries.

So the strategy is:
1. Short SP500
2. Continue to short term trade Australian market with small positions.
3. Watch gold and treasuries markets especially around gold at US$1000 resistance.


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