Sunday, February 28, 2010

February in review

February was a quiet month of consolidation for most financial markets, which took a breather from the more significant correction in January. After hitting a low during 5-6 Feb, most markets bounced back and have been inching up steadily for the remainder of the month. Despite mixed economic news from the US such as jobless claims rising 12% in a few weeks to 496k and existing home sales declining by some 23% in 2 months, the markets shrugged it off and continued trading in a narrow range. Trading volumes in February were also noticeably lower than January. The STI ended flat, up only 5.5 points to 2750.8

Many experts are divided in their outlook over the next few months, however it seems to me that more people are bullish than bearish. For me, I am of the opinion that the markets will go lower first before heading higher. I do not reckon that the STI high of 2947 will be surpassed anytime soon. However a correction of 5-10% would present a good opportunity to increase one's positions in blue chip and other strong dividend-yielding stocks, such as SPH, Suntec Reit, SATS, Starhub, Noble, Olam, CDL Hospitality etc.
Over the longer term (1-3 years), I am more bearish, as there are several problems that have not been sorted out.

Take a look at the table below to see how some of the global markets performed this year.

NameJan changeFeb changeYTD change
Hang Seng-8.0%+2.4%-5.8%

Saturday, February 20, 2010

Portfolio strategy- how to adapt to changing market conditions

Different people have different risk appetites. One should have a portfolio of equities that is best suited to his or her needs and the market conditions, and if possible, other investment instruments such as bonds, commodities or money market funds to hedge against risk.

Efficient asset allocation can make the difference between a good investor and an outstanding investor. He must be able to feel the prevailing trends in the market, have foresight and not be too greedy where profits are concerned. If equities are overvalued, it is perhaps time to take some money out of equities and into lower-risk assets such as market funds, defensive stocks or cash. If equities are generally undervalued or the economy is just coming out of a recession, it is probably wise to increase exposure to equities, particularly growth stocks which are better beneficiaries of the recovery, compared to defensive stocks.

Where equities are concerned, my strategy is to have 3 portfolios with 3 different time frames. The 3 portfolios are for different purposes, have different levels of risk and will usually contain different stocks. Some stocks can fall into more than 1 category. Depending on the individual's preference, one may want to allocate a varying percentage of capital to each portfolio.

The ultimate purpose of each of the 3 portfolios is capital appreciation and growth.

Portfolio 1- Yield/Dividend portfolio

Objective: To generate long-term and stable passive income from dividends ( at least 4-5% annualized return).
Time-frame: 1 year to 5 years or more
Risk: Low to medium
Examples of companies: SPH, Starhub, M1, Singtel, SingPost, Suntec Reit, CapMall Trust, CapitaCom Trust, MIIF

It would be good to buy more on dips when the stock is undervalued and the long-term prospects still look good.

Portfolio 2- Growth portfolio

Objective: For long-term capital appreciation of the stocks
Time frame: 3 years or more
Risk: Medium to High
Examples of companies: Olam, Noble, Oceanus, Ezra, Ausgroup

Companies which fit this portfolio includes those which have plenty of room and potential to grow over the next few years. The quality of the management should be an important factor in this.

Portfolio 3- Short-term trading portfolio

Objective: Short-term trading for capital gains
Time frame: a few days to 1 month
Risk: medium to high

This portfolio is for trading for short-term gains during market swings. Defensive stocks should not be used for short-term trading so much as they usually move less compared to other stocks.
It is better to allocate a smaller amount of capital to this portfolio compared to the other portfolios, say 10% to 20%. Good technical analysis is required.

Thursday, February 4, 2010

STI Mid-week update

Another week of consolidation for Asian markets. The STI, which still seems to be rather weak, rebounded off the low of 2706 before declining to 2750 on Thursday. With yesterday's bounce up, STI is much less oversold with a RSI reading of 30.

STI is still hovering around the 100 day SMA of 2753. Another possibility is for STI to retrace 50% to 61.8% of the recent move down over the next few weeks. 50% retracement is at 2825 while 61.8% retracement is at 2855. However I expect the STI to be consolidating in the 2720-2770 region for a few days. if 2780 is broken convincingly, we could see more upside. I do not expect the 2680-2700 level to be broken any time soon as there is some strong support in the area.

Meanwhile, the Hang Seng broke briefly below the 20000 level before rebounding strongly to a high of 20780. The SSE also hit a low of 2890 before rebounding strongly to its close of 2995 on Thursday.

In the US, the Dow recorded its best 2-day gain in 3 months- just a technical rebound or resumption of a bullish trend?

Monday, February 1, 2010

Dow statistics

It has been widely quoted that from past records, the Dow ends up positive 70% of the time when January was an up month and 90% of the time when its first 5 trading days are positive, which is what happened this year. However the Dow lost its gains and finished -3.7% for the month, signaling that a major trend change could have occurred in the middle of the month.

Not so sure about the reliability of the second statistic as the sample size is probably much smaller- the number of years beginning with 5 consecutive up days is certainly much smaller than the number of positive January months.

Perhaps a better way to refine the statistics would be to check on the years where the Dow fulfills these criteria (which is what happened this year) and check the % of years where it was :

-Up for first 5 trading days of the year
-Down for January

On a separate note, February is quite a neutral month for the STI.