In this post we'll take a look at what has been happening in the market since early August.
This information is taken from The Big Picture, to download a sample copy please just click here.
Is the market healthy or unhealthy?
The way we use to check if the market is behaving as it should is to look at the trading action (price and volume activity) of institutional investors. Why do we do this? The stock market is about six month forward looking and its daily activity is the consensus conclusion whether institutional investors like or don’t like what they see happening down the road. By watching what the big players are doing (buying or selling) each and every day, it can provide essential clues to which way the market is likely to head.
It’s best to try to get ‘in sync’
Institutional investors control approximately 75% of the market’s future direction, which is why we aim to keep ‘in sync’ with them. If you don’t, it feels like trying to swim against a strong current. When you don’t get in sync, you often get hurt financially and that’s why we like to see if the 800-pound gorilla investors are buying, because when they do, it strengthens the market.
However, if they are selling, it weakens it. The other thing we like to keep a close eye on is the behaviour of leading stocks. If the markets best stocks are acting weaker than the general averages, it’s negative. However when leading stocks are outperforming the market, it’s positive.
Bull market? Bear market? Where are we?
Take a look at this 20-year chart of the NASDAQ Composite and you’ll see that the bull market that began in March 2009 (Point A) is just five and a half years old and for now remains intact.
Since the uptrend began, the NASDAQ Composite has made a very impressive 261.8% return. However, to make that gain it has had to experience three challenging corrections. The first (Point B) occurred from April to November 2010. The second (Point C) is a correction that started in May 2011 and ended in January 2012. The third (Point D), began in late March 2012 and finished March 2013. Recently the US technology index had another retracement but this one was not as challenging as the previous three. It started this year on March 6th and it officially ended June 25th (Point E). And as you can see, it’s presently closing in on the high it made back in March 2000 (Point F).
August volatility shakeout weak investors
On the 1st of August (Point G), the NASDAQ Composite fell below its all important 50-day moving average (Point H). Trade was heavy indicating institutional selling. This event plus the previous day’s heavy drop will have caused many technical investors to become nervous resulting in selling off their equities to raise cash.
The braver (or more informed) ones that hung on had a further scare when the NASDAQ’s 18th June breakout looked very much like it was rolling over and about to break down. This occurred August 7th when the US technology index for the first time closed below its 18th June breakout (Point I) – a price point that many technical investors were watching very closely so that they could use it to hit the sell button.
NASDAQ bullishly holds onto recent gains
When we looked at the market Saturday 30th August 2014, we noticed that since the NASDAQ Composite shook out all the weak hands on August 7th (Point J), we’d had twelve up days and only four down days. This action was a clear confirmation that a new uptrend had begun.
Also on that same day, the US technology index had just made a brand new 52 week high (Point K) which technically is very constructive. It is also extremely encouraging that the NASDAQ was still trading above 4486 – a price point that used to be an area of tough resistance (Point L).
Recent decisions appear to be sound
Earlier this year on the 17th May our portfolio was showing a year to date loss of 3.7% compared with the FTSE 100’s gain of 1.6%. That means at the time the UK benchmark index containing the one hundred largest UK stocks was beating us by over 5%. However when we looked at our 13-week portfolio performance August 28th, we were pleased to see that the ‘gap’ between us and the FTSE 100 had seriously shortened. On that day, the FTSE 100 was showing a 1.2% year to date gain compared with our return of 0.9%.
This told us that over that time frame, the FTSE 100 had made no progress at all, in fact it had fallen a little, where as we had made a nice move to the upside of 4.8%. What happened over the period covered is a great investment lesson. It clearly highlights the danger of ‘investor paralysis’ – where an investor can clearly see that funds in their portfolio are no longer performing and yet they can’t seem to find the courage to pull the sell trigger. By burying their heads in the sand and deluding themselves into thinking that things will get better, it can often lead to long-term underperformance, utter disappointment and their confidence completely shattered.
Market taking a breather
Our analysis of the market Friday 5th September highlighted that since the NASDAQ Composite bottomed on the 7th August (Point M) it had had thirteen up days and only six down days. This was yet another confirmation that a new uptrend had begun. However new rallies have to catch their breath every once in a while and when we took this in-depth look, the new uptrend was showing stalling action. For example in its last six trading days, four had been down and only two had been up (Point N). This behaviour told us that the market probably needs a rest.
It’s also worth pointing out that on Thursday 4th September, the NASDAQ bearishly reversed and closed on its intraday low for the second day in a row. This occurred on both occasions after hitting resistance at the 4600 level (Point O). We don’t like negative reversals especially when they are accompanied by heavy trade because they often signal that a correction is in sight. If the market does fall further, ideally 4486, a price point that used to be an area of tough resistance will become an area of solid support (Point P). Failing that, the NASDAQ’s 50-day moving average (Point Q) will step in and do the job.
This information is taken from The Big Picture, to download a sample copy please just click here.
As always, if you have any questions or thoughts on the points covered in this post, please leave a comment below or connect with us @ISACO_ on Twitter.
About ISACO
ISACO specialises in ISA and SIPP Investment and is the pioneer of ‘Shadow Investment’; an easy way to grow your ISA and SIPP at low cost. Together with our clients, we have an estimated £57 million actively invested in ISAs and pensions*. Clients like us because we have a great track record of ‘beating’ the FTSE 100**. Over the last 16 years, we’ve outperformed the Footsie by 60.2% and over the last 5 years, we’ve averaged 14.5% each year versus the FTSE 100’s 8.8%. You can find us at www.ISACO.co.uk.
What is Shadow Investment?
Picking the right fund for your ISA and SIPP is not exactly the easiest job in the world. And knowing 'when' to buy and 'when' to exit is even more difficult! Our ‘Shadow Investment’ Service is here to help. Our service allows you to look over our shoulder and buy the same funds that we are buying.
When we are thinking of buying a fund, we alert you so that you have the opportunity to buy it on the same day that we buy it. We also tell you about when we are planning to exit the fund. You control your investment account, not us. You can start small and invest as little or as much money as you like.
By knowing what we are buying, when we are buying and when we are exiting, throughout the year you can mirror our movements and in effect replicate our trades. This means you have the opportunity to benefit from exactly the same investment returns that we get. Our investment aims are 10–12% per year.
We are totally independent, fully transparent and FCA compliant. We’re warm, friendly and highly responsive and it’s a very personal service that gives you direct access to the Sutherland brothers; ISACO’s two founders.
Who are ISACO’s clients?
Clients who benefit most from our service have over £250,000 actively invested and the majority of them are wealthy retirees, business owners, self-employed professionals and corporate executives. We also have clients from the financial services sector, such as IFAs and wealth managers.
Do you have questions?
To have all your questions answered, call 0800 170 7750 or email us at: info@ISACO.co.uk.
* November 15th 2012: Internal estimation of total ISA and pension assets owned by ISACO Investment Team and ISACO premium clients.
** Long-term performance: December 31st 1997 - December 31st 2013 ISACO 91.3%, FTSE 100 31.1%. 5 year performance: December 31st 2008 - December 31st 2013. ISACO Investment performance verified by Independent Executives Ltd.
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