Approaching ‘Lift-Off Point’ in the Market

Business charts and markets, media concept

The culmination of the last nine months is almost here. In just 24 hours not only will you learn how you can USE the ‘fusion method’ investing strategy to better time your stock investments…you’ll discover three cheap companies currently bucking the broader market’s downward trend.

Fundamentally, all three are attractive. But, importantly, the market is telling you they have turned a corner. They’re moving up. In other words, they’ve hit ‘lift-off point’. You’ll see what I mean tomorrow.

For now, here’s the final instalment of my Facebook video chats with Kris Sayce. Today we talk about gold and whether it’s a good time to buy. You can check it out here.

Ahhh, gold. Why hath thou forsaken me?

I’ve been a long-term bull on gold. I still am. But I’ve been terribly wrong. The market’s verdict is, after all, final.

Who would’ve thought though? I mean, cast your mind back to 2012. The ECB has just said it would do whatever it takes to rescue the system. The Bank of Japan had just promised to go ‘Weimar’ on everyone. And the Fed was churning out $85 billion per month in quantitative easing.

Why wouldn’t you want to own gold? While I didn’t buy the argument that these actions would produce high inflation or hyperinflation, I did think it would cause enough concerns for capital to seek the safety of gold.

What’s that thing they say about opinions? Something about everyone having one…

Well, my opinion on gold was wrong. Horribly wrong. Yet I couldn’t see it at the time. My judgement was too clouded by my long held biases about what gold ‘should’ do.

Like I said, I’m still bullish on gold. Just I’m cautious in the short term. I’m waiting for the market to warm back to the story before getting too enthusiastic.

If you had taken the time to hear the market out…to listen to what it was trying to tell you back in 2012 and 2013, it would’ve been a different story.

By the way, I’m telling you this because it’s something that you can learn to do too. That is, curb your enthusiasm. Listen in to what the market is saying. Let me show you what I mean…

The chart below shows the US dollar gold price. After peaking in 2011, gold went into a corrective period, with support at the US$1,550 level.

Source: Stock Charts


Then, on the back of all the central bank activity I mentioned above, gold broke higher and went back into an uptrend. (Note the short term moving average, the blue line, crossing above the long term moving average, the red line.)

But it was a confusing and false move. The gold price quickly turned back down. The moving averages crossed again a few months later, in early 2013. This was a warning sign for anyone willing to listen.

The market was telling you something wasn’t right. Despite all the bullish fundamentals in the world, gold couldn’t make a new high. In fact, it was going back into a downtrend.

The rest is history. Except for parts of 2014, gold has been in a well defined downtrend ever since. While I think the long term fundamentals for gold remain exceptional, the market says I’m wrong.

And I’m not about to argue. I’ll happily wait for the trend to turn around before I start getting too excited about gold again.

As I’ve pointed out before though, gold in Aussie dollars is a different story. It actually bottomed back in 2013. But with the recent big pullback in US dollar gold, even Aussie dollar gold isn’t looking as good as it did a month or so ago.

Despite the recent bounce, it’s time to be cautious.

Among other things, it was this experience with the gold market that made me reassess and tweak my investment philosophy. As I’ve mentioned this week, I came up with the ‘fusion method’ to identify stocks that are both fundamentally sound AND are in established or emerging uptrends.

The beauty of this methodology is that you can use it in a bull OR bear market. Given the weakness the Aussie market has experienced lately, this flexibility comes in handy.

For example, I’ve analysed the top 50 stocks on the ASX over the past few months for my subscribers. An increasing number of them are in downward trends. That’s telling you to stay away.

Even the stronger stocks are under selling pressure. Yesterday, Telstra announced a decent result, but the market reacted negatively anyway. Telstra’s still in an uptrend, by the way, but it’s not looking as strong as it was.

If this market does morph into a nasty bear, you’ll save yourself a lot of cash and angst by avoiding companies whose share prices are in a downtrend. It doesn’t matter if they’re fundamentally sound or good value. The downtrend warns that a change in investors’ emotional state is brewing. Just like it did with gold.

This reminds me of something I read in the classic book, The Money Game. So I went and fished it out to look up the passage I had in mind. The following is a quote from a ‘Mister Johnson’, a revered figure on Wall Street in the 1960s.

You can have no preconceived ideas. There are fundamentals in the marketplace, but the unexplored area is the emotional area. All the charts and breadth indicators and technical palaver are the statistician’s attempts to describer an emotional state.’

That’s what the fusion method attempts to do…it fuses the fundamentals with the charts. The charting analysis is an attempt to describe the market’s ’emotional state’.

So if you’re willing to ‘have no preconceived ideas‘ there’s a whole new investing world that awaits you. Given that many are now questioning the longevity of this bull market and are nervous about a new bear unfolding, it’s time you thought about looking at things differently. Tomorrow I’ll show you how. Keep an eye out on your inbox around 2pm.


Greg Canavan+,
For The Daily Reckoning, Australia

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

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