Share Synthesis

How to recognise a bubble

noreply@blogger.com (Share Synthesis) — Sun, 10 May 2009 15:29:00 +0000

I have been increasingly thinking about whether if we are in a bubble state as the stock market has surged sharply over the past month. This made me to do some research on ways to recognize bubble and the following is what I have found on the net .

How Bubbles Grow: 12 Easy Steps

1. A believable concept offers a revolutionary and unlimited path to growth.

2. Surplus of funds and lack of opportunities lead to buying or investing in anything available.

3. An idea is complex and cannot be totally explained or related to an investor.

4. The crowd imitates the leader. All Aboard! Even the gardener has a tip!?

5. Prices fluctuate from traditional level to overvalued level, THEN to all new ground and all time highs.

6. New levels are sanctioned by experts. "We are in a new Paradigm!"

7. Fear of missing the boat takes over. Cloning of the idea occurs as many new overvalued competitors enter the market.

8. Lending practices are eased. Money flows like water to anything or anyone with a new idea.

9. Cult figures emerge for the new paradigm. The media promotes lifestyles, not substance.

10. The Bubble lasts longer than expected. Critics are dismissed. The last suckers are sucked in.

11. Fraud emerges as partly responsible for the bubble as the first cracks show in the bubble.

12. Finally, everyone has a reason why it cannot continue. But nobody dumps, and all hold onto their profits. No new buyers. Market stalls.

How a Bubble Bursts

1. A continued new supply of lower priced offerings occurs from rising prices. New IPO's get bigger and bigger

2. There is a rise in interest costs. The Government declares "Excessive Exuberance" and tightens credit too quickly.

3. Prices collapse and everyone heads for the exits at the same time. With no more buyers, prices hit free fall.

4. Fraud is uncovered in many diverse industries, and in monitoring and auditing agencies. This leads to more selling.

5. Governments intervene and give investors time to get out before the real decline.

Rules to Live By
1. Do not extrapolate the future from the present.

2. Trends continue for a long time (2-5 years) and then suddenly reverse chaotically. Witness the Tech Bubble.

3. Intermittent secondary corrections occur at Fibonacci Levels of 38%, 50% and 62% that result in classic Bull or Bear Traps.

4. Bottom picking begins several different times, trying to restart the Bubble, but to no avail. Massive losses occur to professionals trying to manipulate the markets.

5. Finally everyone recognizes that "Trends go further than you expect, and last longer than expected." Everyone gives up and sells.

6. As the volume of the decline decreases, a slow recovery begins.

Above points taken from http://www.solerinvestments.com/Online-Trading/Stock-Market-Crash.htm

Despite personally worrying over the possibility of a bubble, I am still approximately 80% vested in the market now. Reason being, I believe there's more upside due to 1) lesser uncertainty over bank 2) more economic indicators showing it is recovering 3) Read some article mentioning a lot of cash are sidelined by fund houses meaning more fund will be flowing soon 4) Stock market is usually 3-4 months ahead of the economy.

Melynn Investment Experience

noreply@blogger.com (Share Synthesis) — Tue, 05 May 2009 07:29:00 +0000

1. Stock Bought
Ezra (Singapore stock)

2 Reason for making the trades
This trade is mainly of a speculation type and there's no actual reason why I bought this. It is more of a random entry. Thoughts which flow through my mind before making the trade is to try to ride the strong intra day trend and this was derived based on looking at the speed the sell bid is cleared..

3. Holding period
I intend to sell half of my positions within the clearing period(T + 5) and for the rest, I will set a cut loss at 3%. Eventually, I didn't stick to my original plan and sold them earning a total profit of 7%. Reason for not holding longer is because I am no longer comfortable holding such a larger position as I believe any type of negative news will trigger a massive selldown due to people taking profit from the recent surge.

This decision was made partially also because of the upcoming release of stress test results for US banks. Personally believe that a wave of bad news might be coming thus I would rather miss a profit than "blowing"(lose my capital) myself..

Points to ponder
- Am I risking too large of a position such that in the event a rare event happened , I wont have enough capital to pay up my losses. Some rare events might be stock suspension, bankrupt and etc.

I have risked quite a bit for this trade without considering the worst scenario. This is a point which I need to take note of for my future trades.

The stock market direction throughout the day is generally based on economic indicators, analyst comments , interest rates and etc (in short it might be random) therefore a trade which has been doing well in the morning might rock in no time for some reason. All these risk is something I need to take note of for my future contra trades .

Risks can be mitigated by i) Tight stop loss ii) Try to ride the profit but sell half of position when the situation is favorable (like 10% profit)

Although I have made a relatively substantial profit for this trade, there are a lot of other factors which I overlooked like

1) Considering the worst scenario
2) Time horizon too short

One most important thing I need to remember is to always differentiate investments and speculation. Never mix them together by holding on to losing trades which are of speculative nature.

Stock Pick (Google) Summary

noreply@blogger.com (Share Synthesis) — Sun, 03 May 2009 06:54:00 +0000

This will be a page where i will be modifying weekly to update several values like stop trail, relative ratios, ATR as discussed in previous post.

Google as of 01/05/2009
Stock Price : US$393.69
Quantity bought: 17 shares
Price Paid : US$370.69
Total Cost (inclusive brokerage) : $9596.09
Brokerage Fee : $42.77
1R(Downside) = US$762(? of equity)

Highest Price since I entered the trade : US$403.75
ATR(50 day) : 13.925
Stop Trail : 399.82 - (3* 14.805) = 361.975

Fundamental relative valuation as of 01/05/2009

	Stock	Industry	Stock's 5Yr Average*
Price/Earnings	29.6	26.2	67.1
Price/Book	4.4	5.9	10.5
Price/Sales	7.1	5.3	13.6
Price/Cash Flow	19.7	23.5	21.7
Dividend Yield %	---	---	---

Sentiment Gauge

Put/Call Open Interest (3 months)

- Based on the chart, it seems there are lesser interest on put options indicating optimism on stock. Might sell in strength later on.

Short Interest (3 months)

- Steep decrease in short interest thus indicating optimism as well.

Buy/Sell/Hold recommendations by analyst

BUY/SELL/HOLD RATINGS
FOR GOOG

Strong Buy	17
Buy	3
Hold	1
Sell	0
Strong Sell	0

- Gauge sentiment and potential buying demand. Currently very bullish thus it might be top heavy leading to heavy sell off. Need to take caution in this.

Common traits of successful investors

noreply@blogger.com (Share Synthesis) — Mon, 27 Apr 2009 14:16:00 +0000

I have came across an interesting an article on the net and decided to share it here.

The techniques and the characteristics of the most successful investors are diverse, and there's not a guaranteed formula of success. Nonetheless, by following a similar path taken by successful investors, it can help to improve investment returns. Below are some of the key similarities between these successful investing strategies.

Measure your Results and Document your Decisions

As you make buy/sell transactions, document why you are making them. It should be your goal to make the best decision based on currently available information. You cannot predict the future, and you can prove this to yourself by documenting your forecasts. When unforeseen events occur (and they will!), you can go back and review your reasons for making the transaction. This will help you in deciding what you next move should be (buy, sell, or hold).

Remove Emotion from the Investing Decision

The market does not care what you think about a specific stock. In fact, since another party is always on the other end of your stock trade, there is another person that has the opposite view of you about the future prospects of that particular stock. When an investor buys a stock, it is part of human nature to immediately start paying more attention to the current price of the stock. Undeniably it is painful to purchase a stock, and watch it drop 10% over the next few days. Undeniably the investor feels a surge of confidence and pride when a stock happens to rise 10% a few days after the purchase. But these emotional ups and downs can be very detrimental to long term investing success. How can you prepare yourself to not be emotional? First and foremost, be prepared for the ups and downs that you will likely encounter. Before your purchase, imagine that the stock price drops right after your purchase. What will your plan of action be? For example, will you sell after a certain percentage decrease, or stick with the stock? Anticipation of possible future events will help you deal with these events when they become a reality.

In addition, if you have documented your reasons for originally making the transaction, you can review these reasons when the unexpected happens. This will help you evaluate your choices going forward.

Spend Time Doing Research

If you are not able or willing to commit to spending time each week on your investments, then you should not bother with individual stocks. In the case of stocks, halfway understanding what you are doing is much worse than not understanding at all (and therefore buying mutual funds). You should be able to explain in detail to another person why you have chosen a particular stock for an investment. Try this out on your friends, by verbally explaining your rational. You may be surprised at the ‘irrational’ description that you provide!

Evaluate and Re-Evaluate every Opportunity the Same Way

Regardless of your investing strategy (Value, Growth, Buffett, CANSLIM, etc.), a consistent evaluation of each stock is required. By taking the time to evaluate each company, you allow yourself the opportunity to compare and contrast them. With so much information about a particular stock available for free on the internet you can easily perform this evaluation. The specific metrics that you use (price to earnings, price to sales, debt level, sales growth, etc.) can vary for each investor, but for one investor, the same metrics should be used on all stocks being considered.

Once an investment is made, your work is far from over! You must keep track of the events (earnings reports, mostly) that affect your investment. At least once per quarter, you should review each investment and see if your original reasons for buying are still valid. If they are not, then you should sell the stock.

Long Term View

Investors should ignore the fluctuations of the market. Today, it’s quite simple to get quotes, news and other financial information from the internet. While this readily available information is definably helpful, the investor needs to watch out and not get caught up in the day-to-day market fluctuations. The financial press, like the general news media, sometimes over-hype stories, since it is in their interest to grab the readers and viewers attention. The market offers you the opportunity to sell at a particular price. You do not have to take advantage of this offer.

If a company continues to grow in earnings and sales, while debt remains stable or declining, you can ignore the day-to-day, month-to-month, and even year-to-year price gyrations that will be experienced

Taken from http://www.checklistinvestor.com/common.html

Nenix's Take on Olam

noreply@blogger.com (Share Synthesis) — Sun, 26 Apr 2009 15:53:00 +0000

Olam, from the trend is showing weaknesses in its strength despite positive trending. Various indicators are pointing towards a weakening trend with correction. However, as my system is based on trend direction, and not prediction, I have to enter a position. However, I wil be monitoring this counter closely as I think this will be the first counter that will hit the exit criteria.

Trend Direction

Although the trend direction is in an upward motion, the crossover seems weak.

Trend Strength

Trend strength also points to weakness in the trend. The +DI is going down signifying that the strength of the uptrend is weakening. The -DI is showing an increasing trend, indicating a selling pressure. However, as both lines are in the region of 20, it can be said that both strengths are weak in nature.

ATR

ATR has decreased significantly since its low of $0.835, indicating stability in prices.

Momentum

Momentum is currently weakening although generally it is still on an increasing momentum, indicating that the buying interest has waned.

Volume

Volume is in tandem with price direction and this is a characteristic of an increasing trend.

Conclusion

All indicators are pointing to a weak uptrend. However, the decision to enter is due to the fact that it is in an uptrend. Unless I have more screening criteria, I just have to live with it. What I can do is to maybe add more criteria but I feel that it would only make things more subjective, which I do not favor.

If I have to rate this stock, it would be classified as a "weak uptrend stock"

Reproduced with permission from http://nenixdreams.blogspot.com

Nenix's Take on Kim Eng

noreply@blogger.com (Share Synthesis) — Sun, 26 Apr 2009 15:51:00 +0000

The decision to enter Kim Eng was slightly mixed because i reacted quite slowly when I realised the trend. Basically, the trend was showing positively two weeks ago, but i hesitated because the upside seems limited. Anyway, the analysis is as shown below.

Trend Direction

The 12w trend line crossed over the 26w trend line at a price of $1.47. Although I entered slightly late, I manage to get at $1.50. Although it crossed over, I deliberated in getting into this counter because the upside seems limited. However, this is something that I should not have done because I have allowed personal opinions to influence me.

Trend Strength

Trend strength seems to have waned in recent weeks, suggesting that it might go through a corrective phase. However, the +DI and -DI are going in favorable direction, the former going upwards, and the latter going downwards. If this persist, the trend strength would be able to pick up, moving in a favorable direction.

ATR

ATR is showing a decline which is a sign that prices are stabilizing. This is a common trait among most stocks after the panic selling situation that we face last year. The volatility range is about $0.113 per 14w, which is approximately 7.53% in 14w.

Momentum

Momentum is on the strong side with little consolidation. Coupling with the possible scenario of trend strength bottoming out, it is likely that the momentum will continue to be on the upside.

Volume

Volume has been consistent and not much analysis can be made out of this.

Conclusion

Although the trend is on the up, the upside seems to be limited. However, the trend strength as represented in the ADX trend signifies that divergence between the +DI and -DI might continue and thus indicating a increasing trend strength. Momentum is still strongly on the upside with minimal contraction.

On the aspect of volatility, it indicates an approximately 7% movement in 14 weeks, which seems acceptable.

The rationale of entry is due to the trend strength, the sustained momentum and the acceptable volatility.

Reproduced with permission from http://nenixdreams.blogspot.com

Melynn Investment experience

noreply@blogger.com (Share Synthesis) — Sat, 25 Apr 2009 08:05:00 +0000

1. Stock Bought
i) Tat Hong - 14 lots Long (Listed in Singapore market)
ii) Tat Hong - 28 lots Long

2 Reason for making the trades
My first transaction was made because I believed Tat Hong was still relatively cheap at the point of purchase and also it started to gain momentum.

I subsequently bought more of Tat Hong and doubled my first purchase. The reason why I doubled is because it is starting to show strength in its trend with good momentum and even though, it may not be as a good bargain as the previous buy in terms of value but still, I believe there will be more upside.

Downside is limited as I have set a trailing stop loss for the above trades to protect my profits or minimize my loss. This will be discussed more later.

3. Holding period
A total of only 18 days. I didn't expect the price to hit my stop loss so soon but I have to stick to my system so have no choice but to sell it.

4. Selling Point
Set a trailing stop loss whereby it is calculated by deducting (3*ATR) from the stock's high since purchase.

6. How much was the stock sold
In total, I have made a profit of 1347.85 and total commission incurred was like about 10% of the profit. This is the price to pay for holding short term.

Self Assessment
Even though I have made a profit from this trade but still, I think this system wont be sustainable for long term. Reasons being

1. The profit gained from this trade is probably due to luck or merely just pure randomness where the market rallies at the point my purchase , So how many time can I be that lucky? Is my perception of "strong momentum" correct?

2. By following the momentum strategy is like playing the fools game so how sure can I be that I wont be the last to hold on to this?

3. The trading period is just 18 days.. This might be due to my tight stop loss set but assuming this is a losing trade, I will be still incurring the costly commission cost.. Might not be worthwhile on a long term basis

4. The tight stop loss is a double edged sword. On one side it can prevent me from losing more but on another side, this might be just "noise" causing me to get whipsawed.

Points to ponder

How should I align my system to a longer time horizon and at the same time, not seeing my profits getting eroded by holding a stock too long?

Considering the scenario whereby the stock dropped 10% or 20% upon my purchase, should I take the loss or hold it? Instead of just relying on a stop loss defined based on purely technical indicators, I should step back and try to make an objective decision based on

1) Fundamental factors : Can it be over valued ? Can it be caused by short term detoriration of fundamentals (i.e oil and marine sector tend to slump when oil prices are low) . Assuming neither of the mentioned factors are the cause, should I still hold on to it cos a prolonged plunge in stock prices will affect the fundamentals too.

2) Technical indicators indicating down trend even when fundamentals are intact. Should I still hold on to it by going against the crowd? If it is a strong down trend, should I sell first and buy back only when its starting to gain momentum since I don't know how low will it go.

The above 2 should be judged based on a longer time horizon.. i.e, I should not judge a stock's 1 week trend or so.. Should use a longer time frame like 6 months..

3) The above needs me to make decision on an objective basis instead of simply following rules thus I will easily be succumbed to greed and fear. For example, I might sell of the stock when it plunged 20%(fear) and sell the stock once it surged10% profit(greed)..

4) Preparing myself mentally for scenarios like
i ) Stock surge 100%
ii) Stock plunge 50%
iii) How probable the stock price can double?

There are only 3 available choices.. Buy,Sell or hold. This can be answered by going through on a checklist to decide on the action.

I will try to improve my system based on the above points mentioned and experiment it again.

The wisdom of half positions

noreply@blogger.com (Share Synthesis) — Tue, 21 Apr 2009 14:26:00 +0000

I have came across an interesting article in seeking alpha and decided to post it here to share with everyone and also for future reference.

1) Say you bought a stock and it rapidly rallies but yet not to the point where you think it is at fair value. What to do? Sell half of the position, and wait. If the price falls, buy back the position. If it rallies further, sell the rest.

2) Say you want to buy a stock, but it is plunging. You have done your homework - the balance sheet is strong enough to self finance the company and it is currently valued at a huge discount, what to do? Buy half of a full position, and wait. If the company rallies sharply, sell the position. If it continues to fall, wait until it stabilizes, confirm the fundamental and buy up a full position.

3) Say you like a stock, but it has rallied past the buy point. What to do? Buy half. If the stock comes back to the buy point, buy a full position,. If it rallies further, sell the position.

The real benefit of doing half is the psychology of the situation. Many investors suffer from fear, greed and regret. When the stock price moves in favor of profits, be glad of those profits. When the stock price moves against profits, reanalyze and either a) go flat, recgonize your mistake, and being grateful that it was small, or b) increase the bet to full position, and be grateful that you didn't put a full position.

Scaling in and scaling out gives freedom to investors, and removing many of the psychological burdens that they bear. It dosent mean there won't be losses. There will always be losses but they will be easier to bear, with no panic that leads to selling off at the lows, or buying at the highs.

In short, money management is essential to successful investing or trading and this is precisely why I am currently putting more focus in this area.

Read the full article at http://seekingalpha.com/article/131980-the-wisdom-of-half-positions .

Reproduced with permission from http://melynn-lynch.blogspot.com

Nenix's Take on OKP

noreply@blogger.com (Share Synthesis) — Tue, 21 Apr 2009 02:48:00 +0000

I entered OKP when the Trendline crossed over at $0.31 on the week of 6^th to 10^th April, together with Wilmar. The reason it wasn’t published is because I thought Wilmar would require more focus. Anyway, the analysis below is based on my thoughts at that point of time and I will try as much as possible not to include hindsight analysis , knowing that it is in the $0.50 region now.

Trend Direction

As mentioned, this is the “must” criteria for my entry and the 12w crossed over the 26w. The crossover was rather convincing as it is testing a new “high” since the 52w low of $0.13.

Trend Strength

Trend Strength was still on a decline even though it seems to be changing in direction. This indicator in this instance is not very indicative due to the lack of trading volume.

That said, the +DI hit the 40 mark, which signifies its strength in uptrend while the –DI is nearing the 20 mark. This gives clear indication that it has strong uptrend (if you can put aside the fact that this indicator is not indicative)

ATR

It is on a decline and it is a good sign as considering its liquidity, this should have wild swings in prices, but the falling ATR indicates that the stock has already found some ground and is stabilizing.

Momentum

Momentum seems to be cooling down and it might be possible that there will be some correction going on, though the indication is not strong.

Volume

Volume has been the main issue in this stock and no trend can be obtained as its trading volume is not consistent. (*This issue should now be better due to placement shares)

Conclusion

The risk mainly comes from the inconsistency in volume, thus incurring quite a significant liquidity risk. However, the main trend is on the up and with decreasing ATR, it seems that the stock has finally found some ground. Also, trend strength indicates the direction is going up.

All in all, the long term uptrend is going up BUT if you look at the shorter term snap shot, this is a good opportunity for profit taking as it is overbought. It won’t be surprising to see profit taking in the next few weeks and this applies to all stocks as well. And it might even test the previous lows.

Reproduced with permission from http://nenixdreams.blogspot.com

Stock Pick (Tat Hong) Summary

noreply@blogger.com (Share Synthesis) — Sun, 19 Apr 2009 15:27:00 +0000

This will be a page where i will be modifying weekly to update several values like stop trail, estimated value, ATR as discussed in previous post.

Tat Hong as of 23/04/2009

Stock Price : $0.80

1st Transaction (06/04/2009)
Quantity bought: 14 Lots
Price Paid : $0.695
Total Cost (inclusive brokerage) : $9763.59
Brokerage Fee : $33.59
1R(Downside) = $664 (2.6% of equity)

Highest Price since I entered the trade : $0.875
ATR(50 day) : 0.032
Stop Trail : 0.875- (3*0.03) =  0.78

2nd Transaction (13/04/2009)
Quantity bought: 14 Lots
Price paid : $0.760
Total cost (inclusive brokerage) :10676.72
Brokerage Fee : $36.72
1R(Downside) = $1387(5% of equity)

Highest Price since I entered the trade : $0.875
ATR(50 day) : 0.032
Stop Trail : 0.875- (3* 0.032) =  0.78

Profit/Loss = $1347.85

My stop loss was hit and as such, I have cleared my positions. I have realized this system has quite a few drawbacks like getting whipsawed. Will post more on my thoughts in the upcoming post.

Last updated on 23 April 2009

Reproduced with permission from http://melynn-lynch.blogspot.com

Sentiment gauge (Google)

noreply@blogger.com (Share Synthesis) — Wed, 15 Apr 2009 08:03:00 +0000

Following are the indicators I used to gauge the investors sentiment on Google and will be likely to review them every 2 weeks.

1. Put/Call Open Interest Ratio

This is the ratio of total put open interest to total call open interest among options with less than 3 months until expiration. Currently the level is quite high thus it indicates pessimism.

2. Short Interest

The short interest has been decreasing consistently over the past few months which indicates optimism

3. Buy/Sell/Hold

BUY/SELL/HOLD RATINGS
FOR GOOG

Strong Buy	16
Buy	3
Hold	1
Sell	0
Strong Sell	0

Based on the above, it seems analysts are quite optimistic on Google so the question becomes , is there enough sideline buying demand to support the stock , or is it top heavy.

After reviewing the 3 indicators, I noticed they are sometimes contradicting each another therefore I think this is only at best used to derive a rough gauge of the investor sentiment. I don't think I will put much emphasize on these.

All the above images are retrieved from http://www.schaeffersresearch.com

Reproduced with permission from http://melynn-lynch.blogspot.com

Is the recent market rally sustainable

noreply@blogger.com (Share Synthesis) — Tue, 14 Apr 2009 18:08:00 +0000

The recent market rally has let many people wondering if the economy is recovering?

According to an article I read online , it mentioned two out of four conditions need to be met for an economic recover to begin and for the moment , only the fourth condition is partly fulfilled, with timid signs of recovery in China emerging.

i) House prices need to stabilize
ii) Banks must start lending again
iii) Consumers must start spending again
iv) Rest of the world must pick up

Reasons why I think economy has not bottomed out yet.

1) Inventories of house for sale remain high and house prices continue to tumble. The Case-Shiller Home Price Index dropped in January by 19% from a year ago, following an 18.6% year-to-year decline in December.

2) Job losses have been accelerating in recent months

3) Unexpected drop in retail sales as reported on 14 April 2009

4) GM/Crysler bankruptcy repercussions have not even hit yet

5) Standard & Poor’s reports there was a record high in the first quarter for the number of companies cutting dividends (367) and a record low for the number raising them (83)

6) Lot of speculation about which corner of the economy is likely to implode next and start to write the next chapter in the current financial crisis. Credit card debt and commercial real estate are two of the most frequently cited potential culprits

Based on the above, I will still play the momentum game by trading short term and also take more precautions in risk management (i.e not taking excessively large positions and profit take when opportunity arises) or cut loss when my stop loss is hit.

The above info are consolidated from the website http://seekingalpha.com

Reproduced with permission from http://melynn-lynch.blogspot.com

2 indicators to measure investor sentiment

noreply@blogger.com (Share Synthesis) — Tue, 14 Apr 2009 17:13:00 +0000

There are 2 indicators which are often used to gauge the market sentiment . They are put/call ratios and VIX. Both are calculated based on US equities and Index options.

In most cases these indicators are used as contrarian tools: when market participants are most bullish, the likelihood of a downside reversal is greatest; when investors become overly bearish, a market rally may
be on the horizon.

PCR Ratio
Put/call ratios provide us with an excellent window into what investors are doing. When speculation in calls gets too excessive, the put/call ratio will be low. When investors are bearish and speculation in puts gets excessive, the put/call ratio will be high.

It might be more accurate to use equity-only put/call ratio as professional money mangers might use index options to hedge portfolio of stocks.

VIX
VIX is a measure of the level of implied volatility - not historical or statistical volatility - of a wide range of options based on the S&P 500

When the VIX (which is related to the S&P500) is under 20, there is excessive complacency, and over 30 is excessive fear. But just as the Nasdaq is more volatile than the S&P500, the VXN is also more volatile, so anything under 25 is excessive complacency, and over 35 is excessive fear which usually happens when we are close to a bottom.

The importance of these 2 indicators cant be discounted as non economic factors are increasingly becoming important elements and they are best used in conjunction with other indicators. I might consider to use this as one of the factor to determine my entry/exit point (i.e wont buy if its overly bullish) but this might contradict with momentum style so I guess an optimal balance in mixing the strategy can only be achieved through real time experiment.

Free tools to gauge the sentiment can be found at schaeffersresearch.com .

Reproduced with permission from http://melynn-lynch.blogspot.com

Nenix's Take on Wilmar

noreply@blogger.com (Share Synthesis) — Sun, 12 Apr 2009 19:00:00 +0000

The decision to enter a position in Wilmar has been quite paradoxical. I have said that in the short term, the macro situation is overbought and there will be some sort of correction. However, I also mentioned that the mid-term situation looks quite optimistic and in my opinion, stocks seem to have bottomed out. Regardless, the reason I bought Wilmar has nothing to do with opinions. I will break down the analysis into different parts.

Trend Direction

The 12w crossover with the 26w crossover has happened and it indicates that the price increase in recent weeks is faster than the average pace in the longer term. This is just an indication that prices are steadily recovering, which is the main reason why I decided to enter.

Trend Strength

It might not be as indicative as most would believe, but I always use the ADX as a tool for analysis, what good is knowing a direction of a trend if we do not know the strength of it. From the 14w ADX line, it can be observed that it is below the 20 mark. Trend strength is relatively weak at the moment. Trend strength is a cyclical process, similar to momentum, and at this point, it seems to be lowest. I am not guessing anything as ultimately trend direction is the main criteria while the remaining indicators are just supporting rationalization.

As i was mentioning, not only does the trend strength seems to be bottoming out, the -DI line (often an indication of the strength of downtrend) is gradually going down as well, with the +DI line going in the opposite direction.

If there were any indication of worry, it would be the fact that all three lines are hovering in the lower region, which might indicate that trend strength is still low at the moment.

ATR

An indication of volatility, it is now the bane of most trend traders (unless you are a swing trader). ATR has been plunging sharply since its lowest point while prices are steadily going up. This indicates that people are reacting less violently and confidence in stock is slowly creeping in.

Momentum

Momentum has been building up for the past few weeks as observed from the chart. Any retracement (short term trending) has been shortlived.

Volume

Volume trending has been an issue though as volume is decreasing with price increase. This is often the indication of a down trend.

Conclusion

It is definite that the short term trend is on the up and the middle term trend is showing good recovery. However, the recovery of the long term trend remains in question. Nonetheless, the moving average has indicated a crossover, triggering a buy signal. The trend strength supports the general analysis of the situation and decreasing ATR aids the cause as well.

All in all, it is a counter with seemingly lesser downside risk.

Reproduced with permission from http://nenixdreams.blogspot.com

8 habits to adopt be a good trader

noreply@blogger.com (Share Synthesis) — Sun, 12 Apr 2009 08:21:00 +0000

They are:

1. Be Proactive

2. Begin with the end in mind

3. Passion and Commitment

4. Patience

5. Discipline

6. Confidence

7. Control Risk

8. Continue to Improve

The article detailing the above is at Phileo’s.

Reproduced with permission from http://melynn-lynch.blogspot.com

Stock Pick (Google Part 3)

noreply@blogger.com (Share Synthesis) — Fri, 10 Apr 2009 11:32:00 +0000

3. Exit Point

Fundamentals
- I will sell Google when its fundamentals has deteriorated like decline in cash flow and also when, I am no longer optimistic on its growth. I will compare the quarterly result against the previous quarters and also the annual result too .. Will probably come up with a list similar to the one I did for entry to decide again. (This will be an exception whereby I will sell off the stock without adhering to my below stop trail set),

- I will also sell Google if its relative valuation like (P/E , P/S) has ballooned excessively.

Momentum

1. Relative Strength
Weaker 3, 6 and 12 month relative strength.. Anything below 50 will be considered weak

2. On Balance Volume
OBV is downward sloping

3. ADX
Anything between 13 and 14 indicates a weak trend

4. Moving Averages
When Occurrences of fast moving averages go below the slow moving average.

5. Trend
- Parabolic move is fully developed (three or more success trend lines)
- Stock price is near vertical

I will asses the above factors weekly and if there's a need, I will consider to sell the stock even when the current price is higher than my pre defined stop loss trail.

Reproduced with permission from http://melynn-lynch.blogspot.com

*Disclaimer : This analysis is personal and is not an inducement to buy or sell shares of Google. The author of this blog will not be held responsible for any losses incurred due to the reliance on this article.

Stock Pick (Google Part 2)

noreply@blogger.com (Share Synthesis) — Fri, 10 Apr 2009 07:49:00 +0000

I have decided to make some changes to my entry point and position sizing accordingly to the 3 factors I posted earlier..

1. Entry Point

Fundamentals

Operational History
Strong fundamentals with close to zero debt , with nearly 16 billion in cash, annual growth has averaged 120% since 2001 and also passed most of the pre-set screening criteria.

Even though Google has a dominant position in the industry but there are very few switching costs in internet switch and fickle customers might switch to competitors which provide a more useful experience.. One thing also to note is that it is classified as "Very aggressive"in accounting risk so this is something I might want to factor in when buying/selling the stock.

I have read through the in-depth analysis which discusses the positives and negatives on Google in morningstar and have come to a conclusion that this is a good fundamental stock I can hold.

Valuation

	Stock	Industry	Stock's 5Yr Average*
Price/Earnings	28.0	24.6	67.1
Price/Book	4.2	5.5	10.5
Price/Sales	6.7	5.0	13.6
Price/Cash Flow	18.7	22.0	21.7

I will ignore P/B as this is only usually applicable to capital intensive industry like banking.. For the rest of the ratios , it is currently less than the 5 year average so this might be a bargain. This is especially worth noting as the price/sales is currently only at 50% of the average.

Even though it is trading higher than the industry but personally I think it is justifiable given its position in the industry and its prospect/financial health /cash flow.

Momentum

1. Relative Strength
3 Month relative Strength - 78 (Passed)
6 Month relative Strength - 81 (Passed)
12 Month relative Strength - 76 (Failed)

2. On Balance Volume
OBV is currently slightly upward sloping (Neutral)

3. ADX
ADX is currently at 16 therefore indicates the stock is non trending. (Failed)

4. Moving Averages
The fast moving average(14) has crossed over the slow moving (25) one and stock is currently trading slightly below the 200d moving average. (Passed)

5. Trend

2 successive trend lines have been developed therefore I think it has the potential to go further up in the short term (Passed)

Position Sizing

This is how I weigh the factors..

Operational history - 2/3

Valuation - 2/3

Momentum - 3/4

Total of 10 points : 7/10
I will only enter f the total points is more than 5.

I will be using a 50d ATR to estimate the volatile and it is currently at 15.137. Below are the steps I need to take to derive the position.

- Determine the amount of money in account
Assuming I have $25 000

- Determine the amount to risk
For a start, i will set a 2% risk.

- Find out the ATR
Multiply ATR by 2(static)
15.01* 2 = 30.02

- Derive the position by taking amount to risk divide by the above sum
500 / 30.02 = 16.65 shares
~~ 17 shares.

3 factor model (Volatility)

noreply@blogger.com (Share Synthesis) — Fri, 10 Apr 2009 06:40:00 +0000

The position size of each trade I take will be based on volatility and the indicator which I will use to measure is ATR.

ATR is the difference between the high and low price on any given day. It reveals information about how volatile a stock is. Large ranges indicate high volatility and small ranges indicate low volatility

One weakness of using this strategy to determine stop loss is that it might cause my system to be susceptible to noise resulting in unnecessary brokerage costs incurred. To overcome it, all 3 factors which I discussed earlier has to be implemented together..

3 factor model (Momentum)

noreply@blogger.com (Share Synthesis) — Fri, 10 Apr 2009 06:18:00 +0000

I don't really know much on this area yet so if anyone happened to come across this blog, please feel free to comment on it or contribute.

As of now, following are the indicators which I used to check the stock's momentum .

1. Relative Strength
Relative strength, or RS, measures how a stock has performed compared to the overall market over a specified time frame. This info is only easily accessible for US markets.

Six-month relative strength >= 75.
Three-month relative strength >= 65.

For example, a 6 -month relative strength of 75 means that a stock has outperformed 75% of all stocks, in terms of price performance, over the past 6 months.

2. On Balance Volume
OBV attempts to detect when a financial instrument (stock, bond, etc.) is being accumulated by a large number of buyers or sold by many sellers. Traders will use an upward sloping OBV to confirm an uptrend, while a downward sloping OBV is used to confirm a downtrend. Finding a downward sloping OBV while the price of an asset is trending upward can be used to suggest that the "smart" traders are starting to exit their positions and that a shift in trend may be coming. (By investopedia)

If the OBV is moving in the same direction as the existing trend, it is a signal that the strength of the trend remains. When the OBV starts to move against the trend, it is a signal that the existing trend is weakening and may reverse.

3. ADX
Analysis of ADX is a method of evaluating trend and can help traders to choose the strongest trends and also how to let profits run when the trend is strong. (By investopedia)

A low ADX value (generally less than 20) can indicate a non-trending market with low volumes; a cross above 20, on the other hand, may indicate the start of a trend (either up or down). If the ADX is over 40 and begins to fall, it can indicate the slowdown of a current trend. This indicator can also be used to identify non-trending markets or a deterioration of an ongoing trend. Although market direction is important in its calculation, the ADX is not a directional indicator.

4. Moving Averages
Occurrences of fast moving averages crossing over the slow moving average is a bullish signal while the vice versa is a bearish.Current moving average I'm using is 14,25 and 200

Pitfalls of Momentum Trading
Here they are:

Jumping into a position too soon, before a momentum move is confirmed.
Closing the position too late, after saturation has been reached.
Failing to keep eyes on the screen, missing changing trends, reversals or signs of news that take the market by surprise.
Keeping a position open overnight. Stocks are particularly susceptible to external factors occurring after the close of that day's trading - these factors could cause radically different prices and patterns the next day.
Failing to act quickly to close a bad position, thereby riding the momentum train the wrong way down the tracks.

Based on the above, i personally think momentum has to be done in moderation cos I never want to be the last one holding on to it therefore for my future trades, I will try not hold on to it based on greed (Not willing to profit early) or fear (Not willing to cut loss).

Reproduced with permission from http://melynn-lynch.blogspot.com

3 factor model (Fundamentals)

noreply@blogger.com (Share Synthesis) — Fri, 10 Apr 2009 05:36:00 +0000

My entry/sell point is currently based on the following 3 factors Fundamental, Momentum and Volatility. I will be doing trial and error to adjust the weightage of each factors but for a start, I will allocate more weight to fundamentals.

For fundamentals, it will be categorized into 2 section, valuation and operating history. For operating history, I will use both quantitative and qualititave analysis to assess the company's management, financial health, profitability and cash flow.

For valuation, I will use p/cf , p/b, p/e, p/s and compared them against other similar industry competitors or the company's own 5 year historical average. One thing to take note is that companies with low ratios might be value traps and it may take years for the market to find this value and the stock can stay priced at these undervalued levels for extended periods, resulting in opportunity cost incurred as capital will be tied up on the stock.

Therefore to mitigate the risk of value investing, I will add a momentum filter to improve returns by avoiding the problem of waiting for the market to recognize the undervaluation. This will be discussed in the next section.

Not too sure if the above has already been mentioned before in my previous posts but the most significant change which I am making to my current system is to use relative valuation instead of absolute.

Have gotten my inspiration from investopedia .

Reproduced with permission from http://melynn-lynch.blogspot.com

Thoughts on valuation

noreply@blogger.com (Share Synthesis) — Fri, 10 Apr 2009 01:42:00 +0000

I have decided to abolish the use of forecast values as one of my entry criteria after giving some thought reason being :

1) Future is uncertain. The model requires one to project most of the inputs much ahead (like 5,10 years) which is not realistic in my opinion.

2) Tendency to use them to reinforce my decision when faced with uncertainty regardless of its relevancy.

Therefore instead of relying on forecasts, I will value the stock based on real results(i.e trailing p.e) even though this only tells me what the stock "should" have been worth based on earnings from the past . This is a trade off I'm taking but I believe the risk of relying on my own forecasts is much more dangerous.

Melynn - Philosophy on investing part 6

noreply@blogger.com (Share Synthesis) — Wed, 08 Apr 2009 13:32:00 +0000

I have mentioned on the theory of reflexity in my previous posts and even though I have yet to grasp hold of the concept but just the initial understanding has already intrigued me to find out more. I did an extensive search on the net and found an article discussing on this..

This concept is founded by Soros and he attempted to explain his concept of reflexity in the following statement :

"There is an active relationship between thinking and reality, as well as the passive one which is the only one recognized by natural science and, by way of false analogy, also by economic theory. I call the passive relationship the “cognitive function” and the active relationship the “participating function,” and the interaction between the two functions I call “reflexivity.” Reflexivity is, in effect, a two-way feedback mechanism in which reality helps shape the participants’ thinking and the participants’ thinking helps shape reality in an unending process…”

Example (Extracted from the article)
Consider the relationship between a company and its publicly traded stock under normal business conditions. It is intuitive that when the fundamentals improve the share price rises. However, does it make sense that a changing share price might, in turn, impact the fundamentals? Sometimes the answer is yes.

A simple and timely example is seen from the effect of credit ratings. When Moody’s or S&P downgrades the credit ratings of a given financial institution (think AIG), it can have an impact on the amount of collateral the company must pledge to back its obligations. A downgrade also increases the cost of capital for new debt issuances. The view of the S&P analyst is, in part, subjective. The perception of the company’s future prospects and current financial condition plays an important role in the assignment of the credit rating, and and a falling stock price gives a bad impression. The negative feedback loop between capital requirements (fundamentals), stock price, and credit ratings (perception) causes a vicious cycle.

Common to all recessions are forces that cause dynamic disequilibrium between fundamentals and prices.

Some of these are,
A. Jobs losses --> declining consumer spending/confidence --> contraction in businesses targeting consumers --> more job losses due to business contraction, etc.

B. Credit crunches: Business and consumer balance sheets deteriorate --> tighter lending standards and less credit available --> business/consumer spending slowdown --> worsening balance sheets, etc.

C. Stock market declines --> reduced “wealth effect” --> decline in consumer spending --> business contraction --> more stock market declines, etc.

D. Stock market declines --> lower capital gains tax revenues --> rising government deficits --> decreasing investor sentiment -- > more stock market declines, etc.

Details can be found here

His ideology is often mistaken as trend following but one contrasting difference is that he always managed to enter/exit at the reversal point so from this, I gather a clue. I need to come up with an objective view by looking at a bigger picture and in order to do that, I must constantly remind myself not to be distracted/mislead by the daily reports and news.

Reproduced with permission from http://melynn-lynch.blogspot.com

Melynn - Philosophy on investing part 5

noreply@blogger.com (Share Synthesis) — Tue, 07 Apr 2009 16:36:00 +0000

I have been looking at my past trades stretching back to the first very trade I have made since year 2007 which was the bull period. Back then, I always thought I am good stock picker whereby nearly all stocks I bought were multi baggers earning me 20-30 % return in a few months leading me to have an illusion that everything is within my control. During that period, I also tend to think stocks will move as per my expectation, ie picking stocks which is fundamentally sound and buying them no matter how over valued they seem to be by coming up with an estimated price near the present as a support. Therefore whenever I have made a decision, I will find evidence to support it rather than finding ways to refute it. This might sound counter intuitive as the norm will be buying stocks based on evidence instead..

Eventually, when stocks started to plunge a few basis point everyday, I will still see it as a form of correction and cost average it as I believe the value will revert back to the mean eventually. I was apparently suffering from gambler's fallacy where I thought a stock will recover after a few days of consecutive big plunge when in fact, it wont. All these are said on hindsight but i hope I can improve my investment by acknowledging my mistakes soon and correct them.

Nevertheless, i never doubt value investing despite not practicing it firmly. I hope to improve this method by mixing momentum and value together to avoid from incurring opportunity cost by holding on undervalued securities that languish a long time before recovering. Instead of bottoming fishing where a price can always go lower than my estimated price, why not wait for the price to raise a bit (momentum) before entering? Ideally, I would want to pick the highest momentum stocks with the cheapest valuation.. Possible? Downside is that by adopting this strategy, I will inevitably follow the fool game so an important thing is to exit when the expectation is different from the reality on a large scale.This is easier say than done and its something which I have yet to figure out

Firm fundamental investors will buy/hold a stock in an indefinite period and assumption is that large emphasis is placed on the stock fundamentals and not the price volatility but thinking from another perspective, a prolonged plunge in stock price will affect the fundamentals too isn't it.

I will share more thoughts on Soros reflexivity philosophy in the next post which I happened to come across a few days back. Also note that each of my posts might be jumbled up or not related to one another as I am just trying to pen down whatever thoughts that came across my mind so I will like to apologize in advance if it causes any confusion.

Reproduced with permission from http://melynn-lynch.blogspot.com

Dead Cat Bouncing??

noreply@blogger.com (Share Synthesis) — Mon, 06 Apr 2009 15:17:00 +0000

For the past month, stocks have been doing quite well. While it seems like it has hit the bottom, I believe that it is still too early to decide because this might be a retracement from the big selldown in stocks.

As I mentioned in the previous posts, I have adopted a longer term perspective of trading. I shall break down the general trending in stocks.

Short Term (12 days to 25 days)

It seems that it has reached the oversold region if you look at the MACD, ADX of the general STI component stock.

This is perfectly normal as we have been seeing a rally for the past month. However, whether it will hit oversold region and test previous lows remain to be seen.

Medium Term (5 weeks to 12 weeks)

Some stocks have exhitbited healthy mid term trends. These stocks (OKP, Raffles MG, China Fish, Wilmar) have lows higher than their previous lows, which are characteristics of an uptrend. Ultimately, these are the counters that I will be watching closely to see if they are to hit the start of the long term trend

Long Term (12 weeks to 26 weeks)

As stated in the previous posts, this indicator while limits trades, will be very irresponsive to changes and it is the initial indicators that bear the most risk when entering a long term trade. However, while some of the stocks show characteristics of a long term recovery, the fact that it coincides with a short term oversold means that there might be room for correction and risk of downside is therefore high.

Verdict

While there are opportunities, there still lies risks that are quite apparent. The fact that the start of the long term trends of some stocks coincides with the potential peak of some of the short and middle term trends shows that downside risk in the short term is still present. Based on general trends, I would suggest that we should hold and enter our positions at those which shows strong long term trends at prices which is near to previous long term low. This would minimize downside risk.

Reproduced with permission from http://nenixdreams.blogspot.com

Behavioural Finance

noreply@blogger.com (Share Synthesis) — Mon, 06 Apr 2009 13:45:00 +0000

I have been researching on the behavioral finance subject quite intensively recently as I believe this is one important area which I used to overlooked. Behavioral finance studies the potential decision making errors that individuals can introduce into the investment process so by understanding the biases, it can help me learn about common decision-making mistakes.

Following are the list of biases I consolidated from an online article I came across..
Details can be found here .

- Optimism : Unbalanced focus on “best-case” scenarios
- Regret Aversion : Failure to make decisions out of fear of future regret.
- Overconfidence : Excessive confidence in one’s ability to predict and make decisions.
- Cognitive Dissonance : Using rationalizations to avoid change acceptance.
- Self-Attribution : Attributing success to skill and failure to chance.
- Confirmation : Focusing attention on information that confirms one’s beliefs.
- Hindsight : Exaggerated memory of one’s conviction about historical choices.
- Loss Aversion : Avoiding choices that may result in loss.
- Endowment : Favoritism based upon feelings of ownership.
- Illusion of Control : False belief in one’s ability to control outcomes.
- Status Quo : Resistance to change.
- Anchoring : Adjustment Attachment to previous forecasts.
- Representativeness : Allowing past experience to influence the interpretation of new information.
- Availability : Favoring easily accessed information over full information.
- Conservatism : Failure to fully recognize the value of new information.
- Recency : Interpreting recent observations out of historical context.
- Ambiguity Aversion : Avoiding risk during periods of uncertainty.
- Mental Accounting : Innapproriately grouping assets before evaluating their characteristics.
- Framing : Varying a decision process based on a chosen context.

I am victim to most of the biases mentioned above.. i.e anchoring, I tend to derive an estimated value close to the present value as support in face of uncertainty If so, does that mean estimated values are only as useful as random number? Worse, occasionally I tend to use these value to reinforce my decision to buy stocks.

In my current system, I am using an estimated value to derive the entry and positioning so a question I'm asking myself is that, are absolute valuations derived from models like dcf applicable to the market? Is it better to use relative valuation instead or even so, don't use any?

Is there anyway to invest based on the difference between thinking and reality? Well, all the answers to the questions are still uncertain to me and I hope I can be enlightened soon by reading more or by any readers who are reading my posts.