In his seminal financial tome, "Technical Analysis Explained", (which was required reading for Chartered Market Technicians (CMT) when I took the course and still is), Martin Pring discusses the business cycle and the order in which various asset classes lead in market rallies and corrections. While not a market timing tool per se, it helps traders and investors better assess when a peak is coming and when the worst of a recession looks to be nearing an end.
In the beginning of a recovery, consumer spending picks up spearheaded by the housing industry driven in large part by falling interest (finance) rates, followed by the retail sector as stores prepare for increased purchases. Finally, manufacturing activity picks up and demand...
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Articles
“Price is what you pay; value is what you get.”– Warren Buffett paraphrasing Benjamin Graham
Fundamental analysis is the foundation of investing. While technical analysis uses statistics to predict a stock’s price movements, fundamental analysis uses financial statements to determine a fair value for the stock. Many investors use fundamental analysis to determine what stock to buy and technical analysis to determine when to buy and sell the stock, while others exclusively use one or the other.
In this article, we’ll take a look at fundamental analysis in order to understand the language and concepts behind it.
Qualitative Analysis
Fundamental analysis may be largely focused on financial statements, where things like price-earnings...
The most important financial center in the world? A fabled place of silver spoons and golden parachutes? A hub of cut-throat capitalism? Or all of the above. Wall Street is many things to many people, and the perception of what it really is depends on who you ask. Although people’s views of Wall Street may differ widely, what is beyond dispute is its enduring impact not just on the American economy, but on the global one.
What Is Wall Street Anyway?
Wall Street physically takes up only a few blocks that amount to less than a mile in the borough of Manhattan in New York City; however, its clout extends worldwide. The term “Wall Street” was initially used to refer to the select group of large independent brokerage firms that dominated...
Selecting good stocks isn't easy. The sheer volume of companies makes zeroing in on a good stock difficult and the volumes of data on the internet don't make things any easier. In fact, it's hard to sort out the useful information from all the worthless data. Fortunately, a stock screener can help you focus on the stocks that meet your standards and suit your strategy.
Stocks screeners are effective filters when you have a specific idea of the kinds of companies in which you are looking to invest. There are thousands of stocks listed on exchanges in the United States alone; it's just not feasible to track all of them on your own. A stock screener limits exposure to only those stocks that meet your unique parameters.
How Stock...
You've probably heard the terms spread or bid and ask spread before, but you may not know what they mean or how they relate to the stock market. The bid-ask spread can affect the price at which a purchase or sale is made - and an investor's overall portfolio return. What this means is that if you want to dabble in the equities markets, you need to become familiar with this concept.
Supply and Demand
Investors must first understand the concept of supply and demand before learning the ins and outs of the spread. Supply refers to the volume or abundance of a particular item in the marketplace, such as the supply of stock for sale. Demand refers to an individual's willingness to pay a particular price for an item or stock.
Example - How...
The average person experiences the value of currency as fairly stable from day to day. The price of a cup of coffee every morning is around $1.50, the fixed-interest car payment and mortgage are the same every month, and for a salaried worker, even the paychecks are identical. The fact that the value of currency is constantly fluctuating in relation to other currencies only seems to matter for most people when planning a foreign trip or making an internet purchase from a foreign website. This limited view, however, is mistaken.
The indirect impact of exchange rates and their fluctuations extends much more broadly and deeper in ways that affect several of the most important aspects of our economic lives—like how long it takes to get a...
When traders and investors look to profit in the markets, they often look to stocks that they believe will grow rapidly in price. However, there is another group of stocks that can not only offer growth potential, but a steady stream of income in almost any market condition. This group is dividend paying stocks. Let’s examine what a dividend is, how it can benefit you financially, and how to choose the correct securities for your portfolio. Additionally, we can explore methods for protecting these investments in market turndowns.
What are Dividend Stocks?
A dividend is nothing more than a share of the profits of a company. When you purchase shares of stock, you are buying a piece of ownership in that company. Through the company’s...
Warren Buffett once said that as an investor, it is wise to
be “Fearful when others are greedy and greedy when others are fearful.” This
statement is somewhat of a contrarian view on stock markets and relates
directly to the price of an asset: when others are greedy, prices typically
boil over, and one should be cautious lest they overpay for an asset that
subsequently leads to anaemic returns. When others are fearful, it may present
a good value buying opportunity.
Keep in mind, the price is what you pay and value is what
you get, pay too high a price and returns are decimated. To elaborate on this,
the value of a stock is relative to the amount of earnings it will generate
over the life of its business. In particular, this value is...
The currency price of one country becomes stronger or weaker against another country's currency on a daily basis, but what exactly does that mean for those who don't trade in the forex market? Currency exchange rates affect travel, exports, imports and the economy. In this article, we'll discuss the nature of currency exchange and its broader impact on people and the economy.
For the sake of this article, we will be using the relationship between the Euro and the U.S. dollar as our primary example. More specifically, we will be discussing what happens to the economies of the U.S. and Europe if the Euro trades markedly higher against the U.S. dollar. Although the Euro has recently lost ground against the U.S. dollar (1 USD = 0.89 EUR)...
If ever there was a rock star of economics, it would be John Maynard Keynes. He was born in 1883, the year communism's godfather Karl Marx died. With this auspicious sign, Keynes seemed to be destined to become a powerful free market force when the world was facing a serious choice between communism or capitalism. Instead, he offered a third way, which turned the world of economics upside down. In this article, we'll examine Keynes' doctrine and its impact.
The Cambridge Seer
Keynes grew up in a privileged home in England. He was the son of a Cambridge economics professor and studied math at university. After two years in the civil service, Keynes joined the staff at Cambridge in 1909. He was never formally trained in economics, but...
Fundamental Analysis Technical Analysis Day Trading & Scalping How to Know the Difference Between Retracements and Reversals
Most of us have wondered whether a decline in the price of a stock we're holding is long-term or a mere market hiccup. Some of us have sold our stock in such a situation, only to see it rise to new highs just days later. This is a frustrating and all too common scenario. Whilst it can't be totally avoided, if you know how to identify and trade retracements properly, you will start to see improvement in your performance.
Retracements Versus Reversals
Retracements are temporary price reversals that take place within a larger trend. The key here is that these price reversals are temporary and do not indicate a change in the larger trend. A reversal, on the other hand, is when the trend changes direction, meaning that the price is likely...
Value investing is an investment discipline that was popularized by Benjamin Graham through his seminal books like Security Analysis published in 1934 and The Intelligent Investor in 1949. Value investing seeks to identify undervalued stocks that are trading below their intrinsic value, and buying and holding them until they turn around. Such value stocks typically trade at price-to-earnings (P/E) and price-to-book (P/B) multiples that are significantly below the valuations at which the market or their peers trade. While Warren Buffett has amassed a colossal fortune by adhering to the principles of value investing, there is little doubt that for us lesser mortals, value investing has its pitfalls in addition to its undeniable benefits...
It is rare to hear any long discussion of the stock market without some mention being made of the economic outlook. As of Summer 2018, it's safe to say that the economy has recovered to a certain extent from the recession of 2008. What analysts are now wondering about is if the current good fortune is sustainable or if there's another crash around the corner.
Given that the economists on business TV seem to live to disagree, what should a regular investor do? Just what should an economic recovery look like? Follow these economic indicators for signs of a recovery.
Employment
It is difficult to talk about an economy in recovery if people are not getting back to work. There are such things as "jobless recoveries", where there is enough...
As we all know, the stock market has been in a bull run for a very long time. By the time you read this, it will be the longest bull market on record.
In the nine and a half years since the final down month of the previous bear market (February 2009), the S&P 500 Index has increased by almost 300%. That makes it an average compounded annual growth rate of over 15%. Add in an annual dividend yield of around 2%, and the past decade has been a very good time for stock investors.
The current environment seems favorable to a continued boom in the stock market. Corporate earnings are at record highs and GDP growth is strong; while unemployment and inflation are both very low. It’s a Goldilocks economy again – not too hot, not too cold, just...
Individuals seeking income and/or the preservation of capital often consider adding bonds to their investment portfolios. Unfortunately, most investors don't realize the potential risks that go along with an investment in a debt instrument. In this article, we'll take a look at some of the more common mistakes made - and issues overlooked - by fixed-income investors.
Interest Rate Variability
Interest rates and bond prices have an inverse relationship. As rates go up, bond prices decline, and vice versa. This means that in the period prior to a bond's redemption on its maturity date, the price of the issue will vary widely as interest rates fluctuate. Many investors don't realize this.
Is there a way to protect against such price...
When it comes to investing, there is no shortage of theories on what makes the markets tick or what a particular market move means. The two largest factions on Wall Street are split along theoretical lines into adherents to an efficient market theory and those who believe the market can be beat. Although this is a fundamental split, many other theories attempt to explain and influence the market - and the actions of investors in the markets. In this article, we will look at some common (and uncommon) financial theories.
Efficient Market Hypothesis
Very few people are neutral on efficient market hypothesis (EMH). You either believe in it and adhere to passive, broad market investing strategies, or you detest it and focus on picking...
Everywhere I turn these days, I see articles discussing how over-extended U.S. equity valuations have become. If I took a shot of mouthwash every time I came across an article that talked about U.S. equity valuations, I’d be leaving Las Vegas, Nic Cage-style, minus Elisabeth Shue. I monkey-hammered the idea of valuation as a catalyst for an equity market drawdown several weeks ago, but this week it’s woodshed time for Mr John Hussman.
Hussman has a brand new commentary beating the same dead “S&P 500 is overvalued” horse, but this time he’s coined a new phrase to describe the S&P 500: “offensively overvalued.”
While I obviously can’t say for certain what this guy uses to make investment decisions, it’s not a stretch to assume that...
Can the market predict a recession? A “yes” answer might seem tautological on the surface, but isn’t. A recession is technically a reduction in economic activity, rather than in stock prices. Rephrasing the question a little, is it possible to have, whether in the long term or the short, an environment of low stock prices and high real income (along with high industrial production and employment)? To the first part, certainly not if the population at large is relying on stock appreciation for its remuneration. But given that wages and salaries still make up the bulk of most people’s personal income, a bear market shouldn’t affect said income by all that much.
Information, Not Opinions
The data isn’t hard to plot. Sustained reduction of...
Imagine you had invested $10,000 at the bottom in 2008. The results you find below might not blow you away on an actual basis, but the amount invested is all relative based on your financial situation. It’s the percentage gain that’s more important because that number is going to be the same for everyone – assuming investors poured money into the market at the exact same time for this hypothetical situation. In addition to looking at how much money you would have made, we’ll also take a brief look to see if the same kind of return is possible over the next eight years.
S&P 500
The S&P 500 consists of approximately 500 large-cap stocks (it’s never exactly 500 stocks these days and tends to change) that are either listed on the NYSE or...
Following a move to the USA, it led me to thinking more about the world of Forex Markets and how it has such a huge impact on all of our lives as a result of its movement, yet so few of us are even aware of just how important this impact really is.
Whether we like it or not, when we live in a particular country and are earning and saving as much of that nation’s currency as we can, we are effectively long that currency. If you live in Great Britain, then basically you are long GBP. If you live in Japan, you are long the Yen. And, if you live in the USA, you are long the dollar and you have a passive interest in the value of the dollar going up. Think about it like this: if you bought a stock and owned it for the long term, you are long...
The use of the fundamental approach in trading has long been an object of argument between its followers and those who mercilessly deride the method's usefulness. We will not take sides in this eternal argument, but we will try to find out how the average trader can benefit from fundamental analysis. Read on to discover the strengths and weaknesses of fundamental analysis as a traders' tool.
The Mechanics
The fundamental approach is based on an in-depth and all-around study of the underlying forces of the economy, conducted to provide data that can be used to forecast future prices and market developments. Fundamental analysis can be composed of many different aspects: the analysis of the economy as the whole, the analysis of an...
With the new year only a few days old, there’s still plenty of time for retail investors to craft their strategy for 2015. Like last year, 2015 is full of promise and better overall economic conditions are ahead. Globally, we should continue to improve since the depths of the Great Recession and credit crisis. But the best conditions for stock market gains could be found in the United States.
According to several market strategists and analysts, the U.S. is still the best nation to bet on in 2015. For investors, that means staying strong or even adding to their U.S. stock holdings in the New Year.
Hoping For a Four-Peat
When it comes to picking which stock market may be the best horse to ride, investors may want to stick with the...
Calculating investment performance is one of the first things finance students must learn in business school. Along with risk, return is a fundamental concept that is clearly important when dealing with wealth and how to grow it over time. The compound annual growth rate, or CAGR for short, represents one of the most accurate ways to calculate and determine returns for individual assets, investment portfolios and anything that can rise or fall in value over time.
The CAGR represents the year-over-year growth rate of an investment over a specified time period. And as the name implies, it uses compounding to determine the return on the investment, which we will see below is a more accurate measure when those returns are more volatile...
The bailout of Greece's economy and the subsequent action to restore Cyprus' economy were the big Euro-stories of the last three years. A year on from the Cyprus crisis and a few weeks after the Greek government returned to the private capital markets, all seems to be quiet but is this the lull between storms?
The stories of the fall of both countries' economies has many similarities yet many differences but neither country is out of the woods yet. In this article we examine the causes of the collapse and what the future holds for each.
Behind the terrible state of the Greek economy which first came to light late in 2009 and into 2010 was the systematic fabrication of economic statistics which hid a growing fiscal deficit which was...
In 2008 I wrote an article for T2W entitled: Housing Boom – is the party over? in which I categorically stated that I expected house prices to fall substantially and that investors should look to invest in the stock market from 2008 onwards. I was right on both counts. House prices in some areas have dropped as much as 25%, while the average stock market index has nearly doubled.
After a decade long boom due to lower interest rates and easy lending, the party finally came to a sticky end for U.K. property prices in 2009. According to Land Registry, property prices in the U.K. rose by an astronomical 200% in a decade.
Five years on, I find it difficult to make a case for increases in house prices in the U.K. based on numerous factors...
With the final approval of Germany's supreme court in hand, Germany can now legally join the latest eurozone bailout attempt in the hopes of offering more time and more stability to an area still roiling with the fallout of sovereign debt crises in multiple states. While the citizens and governments of many other European countries would no doubt deeply resent the idea of the European Stability Mechanism (ESM) as a "German bailout," make no mistake - without Germany's ongoing participation and financing, there would be serious turmoil in European financial markets.
In for a Pfennig, in for 190 Billion Euros
With the approval of Germany's supreme court in mid-September, the ESM can now move forward as the latest effort to stem the...
One asset category that is not very well understood is what we refer to in the business as the credit markets. In the futures market, these encompass all debt instruments such as U.S. Treasury Bills, Notes, and Bonds, and are not limited to derivatives of debt issued by the U.S. treasury. The German debt market can also be traded here through most futures brokers on the Eurex exchange. These derivative instruments come with funny names like Schatz, Boble, and Buxl, and finally, the Bund. The different names in all debt instruments are there simply to differentiate the short, medium, and long term maturity dates.
These particular European markets are nice to know about, but for those of us in the U.S., they're not as important as say...
Can a sector rotation strategy improve performance of investment returns? In this article the author looks at sector rotation within the US markets.
Investors can most certainly use a sector rotation strategy to produce returns which outperform the market, or even some hedge funds, despite what was described in a recent article. Many hedge funds would be wise to consider such a strategy. However it's not as easy as the plan described in the article's abstract. Nor should we expect it to be; the market is not easy-pickings. But recognize what market returns we are talking about: since say 1990, the S&P has had about an 8 pct compounded annual rate of return, while experiencing about a 46 pct maximum drawdown. Those numbers can be...
China was never at the heart of the global financial crisis, yet in the past two
years worries over China's economic future have not been relieved. The media
warned China a year ago about its massive overcapacity and an impending
economic collapse.
Today the case is just the opposite and the international community is more
concerned about China's overheated economy. China's moves to raise overall
wages and to introduce an exchange rate regime reform have topped the
headlines recently. Although China of course faces challenges ahead, we do
not think there is much cause for concern.
China has successfully weathered the global financial crisis, thanks to the
governments massive stimulus plan and the central banks huge liquidity...
The Disaggregated COT Report
The first Commitments of Traders ("COT") report was published back in 1962 and antecedents of the report can be traced all the way back to 1924. Since its inception, the COT report has gone through numerous changes and improvements over the years. The Commodity Futures Trading Commission ("CFTC"), an independent US agency created by congress in 1974 to regulate the US commodity futures and options markets, is responsible for maintaining the COT report and publishes the data on its website (www.cftc.gov). The CFTC also provides several decades of historical COT data on their website.
The COT report provides a breakdown of the buying and selling that takes place in the futures markets each week. By...