This month an important inflection point appears to have been reached in a number of markets. With perfect timing, many seem to be approaching their lows as this blog goes to post.
Given that serendipity, I've decided to concentrate on highlighting these opportunities and am postponing our detailed chat about cash and savings until next month. I know, I know, you were so looking forward to getting the lowdown on the latest fixed-rate ISAs... but I hope you'll forgive me because right now, friends, there's moolah to be made.
Shall we get down to it?
Here's the big picture - click to enlarge
In the news - and in my February On the Money post (it's an important one, please don't miss) - there are an increasing number of reasons to be fearful of major trouble in the markets. I believe these fears will be realized - the only question is when. That's where technical analysis can be extremely instructive, and the answer it's currently giving us seems to be: not quite yet. Here's the outlook:
ONE TO TWO MONTHS
The approximately 10% correction we've seen since mid-January (and which I warned was imminent in last month's Outlook) appears, according to the myriad of indicators I follow, to be coming to an end. Of the dozens I watch, 17 key indicators track the internal condition of the US indexes (which always lead our own), and measure such esoteric metrics as momentum, breadth and volatility, plus various forms of risk appetite and risk aversion. Click on the links for examples. Many of these are now approaching levels which suggest the probability of a 10%+ rally in the next couple of months is high compared to the current risks, which are of a fall to a strong support level (the 200-day moving average) approximately 4% below here.
- I'll therefore be buying on any further weakness over the next days or weeks. The US S&P500 index as of February 8th sits at 1056. Should it subsequently rise approx. 10% (close to or above new highs at 1150) I will start to sell on any signs of technical weakness. If the index instead makes a sustained break below its 200-day moving average (currently 1020) I will simply sell my holdings.
- My preferences, as far as investment vehicles goes are as follows: In the UK and US, I prefer slightly more defensive sectors, including industrials, pharmaceuticals, tobacco and utilities which have lagged since early 2009, in combo with some smaller companies which are more speculative. I do not tout last year's hot sectors such as financials, commodities and tech as I believe their period of out-performance has likely ended; in addition, commodity risks have risen (see this month's On the Money) and the banks are once again facing major headwinds.
- I'll mainly be buying ETFs (Exchange Traded Funds) through my broker. These are traded just like ordinary shares, but track the returns of a particular index. For example, 'ishares FTSE100 ETF' which trades on the London Stock Exchange, replicates the percentage returns of the entire FTSE100 index day-to-day. I'm also looking at ETFs from US companies such as Proshares, which track the American indices. With rare exceptions, mutual funds and unit trusts do not perform any better than the indexes they seek to beat, and are too expensive and cumbersome for short term trading purposes. For US investments, I'll also establish a small position in the UK pound versus the US dollar to protect against a possible currency reversal.
THREE MONTHS TO ONE YEAR
Of course indexes are not under any compulsion to reach new highs just because one believes they 'should'. We might find ourselves stuck in a range for several months. And even if we do rally 10%, we could peak at that point and end up falling back below current levels later in 2010; in fact, given the lurking dangers I highlight in this month's On the Money post, I believe a drop sometime this year is more than likely and it could come sooner than anyone thinks. As the market rises therefore, I will become ever more cautious about taking positions and may soon end up fully in cash.
ONE TO THREE YEARS
At some point before 2010 is out, I anticipate the return of the bear. Given all the headwinds this economy faces, I fully expect to see either a very sharp crash, a gradual rolling over into a new bear market, or both. It may therefore become critically important later this year to quickly realize any gains, exit all your stock or bond positions and sit in cash. If you want to keep your shirt it will be vital to move quickly and not hang on in hope if and when things turn south.
- The over-riding story over the past month has been the resurgence of the dollar, and nothing priced in dollars has been spared Uncle Sam's wrath.
- Technical and sentiment indicators suggest that (in the short term) most of the damage to commodities is behind us as the greenback closes in on its 200-week moving average; unless a major crisis develops immediately, it will likely meet resistance at that point.
- Precious metals are at or nearing worthwhile buy points - though only for short term (month or two) trading opportunities. Do not assume commodities will keep on rising, for the reasons explained above and in this month's On the Money
- The ONLY diversifying tool for your holdings in commodities - or any other risk asset for that matter - is now the US dollar
- Gold was set a key test last month - whether it really is a safe-haven amid fears of sovereign debt default and currency crisis - and it conclusively FAILED that test. Unless it begins to show strength despite rises in the dollar, which it eventually may, you cannot be confident it will protect you in a currency crisis. Bottom line: gold is in a speculative bubble dependent on dollar weakness. Be warned!
- Shares beat property as an investment over the long term
- UK house price indexes continue to show modest rises, but the rate of growth is slowing and only a tiny proportion of the country is seeing price appreciation - this is the cold truth behind the comforting headline figures
- US home prices begin to roll over after last year's hiatus
- Last year's apparent resurgence in the UK is, according to all but the most fevered optimists, a temporary phenomenon of cash-rich buyers meeting chronic lack of housing supply as sellers - and banks - hunker down.
- UK homeowners in trouble haven't been forced to sell with interest rates so low but now, forces are gathering to push rates higher (and see 'Ring of Fire' in this month's On the Money)
- The fundamental problem remains: this generation has demographically peaked in its home-related spending and, having pushed prices into orbit in a debt-fuelled orgy of speculation, have made British homes too expensive for their children to afford. It may take two years, it may take twenty years, but the bottom line is inescapable: either wages will have to rise, or house prices will have to fall. In this environment, which do you think is most likely?
- The outlook for government bonds is covered extensively in this month's main post
- Once again during this correction, the only sure safe haven has proved to be the US dollar. Other traditional diversifying assets such as gold are no longer working, as all have become instruments of speculation in the so-called dollar 'carry trade'. As governments and central banks begin to withdraw the stimulus which has kept the world economy afloat and as interest rates start to rise, that tide of speculative money which was unleashed will begin to flow back home - out of riskier bonds and investments and back, largely, to short-term US Treasury bills and the US dollar.
- Corporate bonds are now weakening and, given how extended above their long term averages they've become, look ready for a setback; if they're lucky, it will only be an extended consolidation.
- I'll be taking a good long look at the benefits of savings and cash in next month's Outlook
- Keep half an eye on this chart. If US 10-year interest rates exceed 4% (or if UK 10-year gilts rocket for that matter - I'm yet to get hold of a chart of those) it will be time to start seriously thinking about putting your cash into fixed-rate long-term bonds, as their interest rates will rise to levels we may not see again for many years. More next time...
That's quite enough for one Outlook. Tune in from Sunday March 7th to see if and how these buy signals are performing. Meantime, have a great month!