Have a look at last week’s chart below. Looks great right? This is the kind of chart that every investor wants to see. Unless, of course, you decided to short sell.
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Source: Yahoo Finance
Judging by last week alone, you’d be tempted to pile into stocks. Forget about diversification, cash or picking the right stocks. Any old index tracking ETF will do. There’s money to be made! And if you’d gotten in right at the low on Monday, you’d be a happy investor today.
But, of course, life is all about perspective. Very few investors bought in at 4987 points on Monday morning. Many more likely bought in Thursday afternoon as the market was spiking sharply higher. And most investors didn’t buy or sell any shares this week. Their shares are held long term by their super funds.
My point is that judging the market by its performance over the past week is like standing six inches (that’s a tad over 15 centimetres for our younger readers) from a Georges Seurat painting.
If you’re not familiar with Seurat, he was a 19th century painter, now famous for his pointillism technique. That’s where you create an image using thousands of small coloured dots of paint.
I recall seeing one of his paintings, La Parade de Cirque when it was on loan to the Smithsonian in Washington DC a number of years ago. One of the interesting things with pointillism is that when you stand close to the painting it looks like nothing at all. It’s not until you slowly back away that the image becomes clear.
The same is very much true for the markets. So let’s take a few steps back. Below you can see the ASX 200 performance since the beginning of 2015.
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Source: Yahoo Finance
The image looks a bit different when you back away, doesn’t it? To date the ASX 200 is down 4.5% since the start of the year. If you backed off a full two years you’d see that it’s down 2.8% over that time. And as you well know, the index is still down 20% since its peak in October 2007.
Does that mean there’s no money to be made in the stock market? Of course it doesn’t. It just means you need to know where to look…or you need the right system.
Let’s talk about where to look first.
No earnings growth for the top 300
A few weeks ago I wrote to you about the sub-par performance of blue chip stocks over the past year. While historically blue chips — as a whole — are less volatile than small-caps, they are not immune to economic slowdowns, competition, changing market dynamics, or poor choices by management.
And as you can see from the chart above — comprised of the biggest 200 companies on the ASX — their performance can be less than stellar. And the outlook for 2016 isn’t much better.
This from the Australian Financial Review:
‘On analysts’ forecasts there will be no earnings growth in the 2016 fiscal year for the top 300 companies. It is forecast to be zero… One very popular hunting ground for growth is in the small-cap space…’
That is a good hunting ground. Small-caps, while generally more volatile, can often give you a much bigger bang for your buck. You can see that with the returns for the ASX Small Ordinaries, comprised of the smallest companies in the index. I’ll spare you another chart, but the return since the beginning of 2015 for the Small Ords is 2.6%. Quite an improvement on the negative 4.5% returned by the big blue chips.
This will come as a no surprise for Sam Volkering and the subscribers of his investment advisory, Australian Small-Cap Investigator. Although not every one of his recommendations is in the money, the vast majority are. And no less than 11 of his recommendations have doubled, tripled, or even more than quadrupled since he tipped them.
On Tuesday last week Sam recommended his readers sell one of his most profitable recommendations, one that has returned a 575% gain in less than 14 months. Since he’s now sold the stock, I can share the specifics. Here’s what he wrote to subscribers last Tuesday:
‘The mainstream media now cover Bellamy’s almost every day. And it’s about to breach $1 billion valuation and even enter the ASX 200. With these facts in mind, I think it’s the perfect time to sell and take those profits now that it closed on Monday at $10 a share.
‘While I could be wrong, I think locking in 575.7% profits is a big win. So here’s what to do…
‘Action to take: Sell Bellamy’s Australia Ltd [ASX:BAL] at any price over $10. I will record the sell price at $10, which will lock in a 575% gain in just over 13 months.’
Sam’s set to release his November issue of Australian Small-Cap Investigator along with his latest recommendation today. You can find out more about Sam’s small-cap investments here.
OK, now we know one good area to look for gains in the year ahead.
Now how about a system that’s managed to produce gains from a portfolio that includes many of the stocks from all across the ASX 200?
Happy birthday Quant Trader
Look, I’m a pragmatic guy. So I can understand if you’re sceptical when you hear about algorithmic trading systems beating the market. I’ll admit, I was sceptical myself when we first brought Jason McIntosh aboard with Quant Trader last year.
In first meeting Jason it was clear that he’s a bright guy, with an impressive background on the trading floor. And the back testing he provided for his ‘black box’ trading system was undeniably impressive. But I’ve seen impressive back testing results before in systems that flopped when they were introduced in real time.
So I had my doubts at first. But no more. You see, Quant Trader just celebrated its first birthday — live signals began 12 months ago. And the results actually exceed those Jason presented with his back testing last year.
Here’s what Jason wrote to subscribers of Quant Trader last week:
‘Looking back, I’d say Quant Trader’s start date was just right. Not because a roaring bull market was beginning. But because the worst conditions since 2011 were upon us.
‘You see, anyone can make money in a bull market. Trading seems almost effortless. People begin to believe trading is an easy way to make money.
‘But it’s never that simple.
‘The easy pickings of a bull markets never last. Successful traders also need to navigate the tough times. This is when you see who really knows their stuff.’
Jason went on to analyse the specific trades his system has flagged. Both long and short trades. He provided the following two tables summarising the results for the past 12 months of trading:
You can see that the long trades easily outperformed the shorts, returning $2.63 for every dollar lost. The shorts also managed to gain, but the returns were much smaller. But as Jason explains,
‘That’s not unusual. A short portfolio typically makes most of its money in big bear markets. I view shorting as insurance. Its job is to buffer the long portfolio in a large downturn. The rest of the time I’m happy for it to breakeven. Most of Quant Trader’s profits are from long trades.’
Pragmatic or not, you have to admit these are excellent real world results when the All Ordinaries is down close to 4% over the same period.
There’s no guarantee that 2016’s results will be as good. There’s also no saying they won’t be a lot better! Either way, my scepticism has been put to rest.
You can learn more about Jason’s trading system here.
That’s all for this week.
Managing Editor, The Daily Reckoning
Ed Note: This article is an edited extract, first published in Port Phillip Insider.