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Peaks and troughs in the Chinese stock market

Thursday, January 14th, 2010
 

We wanted to evaluate the peaks and troughs in the Chinese Shanghai A share stock index and see how they compared with the US benchmark (S&P 500).  The Shanghai index defines how a “high octane” market performs.  What we did was look at all the major peaks and troughs in the SHASHR index and see for the exact same period how the US market performed.  We were surprised by the results. 

Keep in mind that what occurred during the past 15 years (pay attention to timing):

  1. On a total return basis the US equity market had no negative returning years in the 90s.  The Shanghai market on a calendar year basis was down -21% in 1994 and -14$ in 1995.  The major bottom however occurred in July 1994. 
  2. The LTCM crisis and Russia default in 1998 was a blip on the screen in the long term bull market of this period.
  3. The US officially entered into recession in 2001, but the TMT bubble burst in March 2000.  After declining nearly 50% the US equity market bottomed out in March 2003 (October 2002 had a false bottom!) and began a multi year bull market till the end of 2007. 
  4. The financial crisis was a multi year event but most major Equity markets peaked in October 2007.  The US equity market had a false bottom in late 2008 then had a mini rally til the lows were retested in March 2009 (where the major bottom was formed).

China versus the US (local currency) The first major market correction from 2001 through 2005 coincidede with a positive return in the US market. The next bull market run from 2005-2007 in Shanghai was met with a modest +30% return in the US market - note it already had a huge runup. The financial crisis and subsequent market recovery showed a very similar tune. Taking a step back for a second, we wondered how Brazil performed during these times: Brazil, US and China ..... local currency

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Posted in Business Cycle, Market Talk, Stocks | No Comments »

Market Technicals

Wednesday, January 13th, 2010

One of the best contrarian indicators we know of is the % deviation from the 200 day moving average.  Its intuitive and reliable.  The simple explanation is as follows: an extreme deviation from the moving average signals an over bought or over sold condition. 

% deviation - measure the shaded area!

Many people look simply at whether the current price is moving above or below the moving average.  But in a low volatile environment by default the price indexes will essentially hug the moving average and thus provide little insight.  At market extremes however you will see a strong deviation from the moving average.

Current indicator readings

Its clear that the EM countries are indicating some frothiness.  Brazil is up 139% since its lows in March … this bull market is well advanced and it seems that adding money to EM is a bit “after the fact” performance chasing and is not a good place to bet your portfolio dollars.

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Posted in Market Talk, Stocks | No Comments »

How we view market risk

Friday, January 8th, 2010

Risk is alot like rain, and your asset allocation is alot like an umbrella.  Your portfolio (you) always seem to get wet on your feet and the bottom part of your legs, right? Thats because the part of your body most exposed to the rain is your “risk assets” such as Equities and Commodities. These are the more volatile assets which though they have the best chance of giving your portfolio a substantial boost are also the most exposed when “the bear comes a-knocking”. The dry, upper part of your body? Thats the Bonds and Cash in your portfolio. Much more protected from the rain and thus less susceptible to market swings.

Risk and the Umbrella

 Covert Analytics aims to be your bigger umbrella! 

Covert Analytics = less risk

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Posted in Asset Allocation, Bonds, Our Approach, Stocks | No Comments »

Japan playing catch up

Monday, December 28th, 2009

Japan’ s problems are well known: major underperformance of the stock market, sluggish domestic economy, strong currency, aging population, high fiscal deficits, etc.  What is interesting is the uptick in performance of the Japanese stock market compared with the global benchmark.  Is this a sign of things turning around for Japan? Looking at the MSCI numbers for December (through Dec 24) we see that Japan is up 8.9%, compared with 2.9% for the S&P 500, and 4.8% for Europe.

Lets take a quick look at Japan.  First and foremost, it should matter to any investor. It is the second largest economy in the world. Second the stock market is down nearly 75% from its peak in 1989 and investors should be monitoring this economy closely to see if structural forces are in place to spark a rally. Note that this year there was an important shift of power in Japan: the Democratic Party of Japan (DPJ) took over after 54 years of rule by the Liberal Democratic Party (LDP). Could this serve as a catalyst for Japan to do what is necessary to ignite the economy?

Forget for a moment that Japan has the highest debt to GDP ratio in the world (near 200%).  They unveiled a 7.2 trillion yen stimulus package on Dec 8, a week after a 10 trillion yen credit program to support the economy. This is looking more and more like Japan is trying to play catch up and start quantitative easing in the British / American sense.

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Posted in Market Talk, Monetary Policy, Stocks | No Comments »

SPX reaching 2009 highs

Thursday, December 24th, 2009

The S&P is now trading at 1125 (its 2009 high!). Since early November, SPX has been very range bound: between 1090 and 1110. This is a great move but it is occurring on a low volume week, so hopefully it stands when normal volume resumes in early January. Using historical secular bear market recovery rally averages the S&P has another 10-15% left (using historical averages). That would imply 1250 ish. After a collapse of approximately 38% last year for the SPX a 25% return this year is a breath of fresh air – but still leaves us 28% below the peak, and at the exact same level as early 1998. A full decade of zero returns … and for all the gut wrenching twists and turns that the stock markets provided investors in this decade, you figured they would be rewarded!!!

 

Globally, developed markets are also hitting their 2009 highs:

DAX (Germany) at 5957 – up 27% (in US$), CAC 40 (France) at 3912 – up 25% (in US$), FTSE 100 (UK) – up 33% (in US$), Nikkei 225 (Japan) is almost at its 2009 high at 10536 – up 18% (in US$)

Interestingly, Emerging Markets are mostly below their 2009 highs (though of course these have surged ahead of developed markets) :

Bovespa (Brazil) is down 5% from its ’09 peak – but up 137% (in US$), Shanghai A Shares (China) is down 9% – but up 78% (in US$), RTSI (Russia) is down 4% – but up 121% (in US$)

Posted in Market Talk, Stocks | No Comments »

The best defense is offense

Thursday, December 3rd, 2009

We all know how difficult the investment climate has been for the past decade. What’s worse: the outlook going forward is increasingly tricky, and human nature causes us to extrapolate recent trends out into the future and expect for a similar outcome.  After disastrous portfolio performance resulting from the 2000-02 TMT bear market or the 2008-09 Great Recession it seems investors would be happy to achieve steady returns north of 5%, an unimaginably boring bogey in the prior two decades. 

In addition to being boring, this target return would be seen as “un-ambitious” before, but now seems difficult to achieve, especially in a world of near-zero interest rates and in a world with enormous financial and economic uncertainties.  Evaluating global stock markets is tricky if we are on the verge of a “double dip” in the developed economies. There is talk of too-hot speculative activity in the BRICs. Investing in government bonds feels like skating on thine ice due to an ever increasing supply from the money printing central banks. Gold is breaking new all time highs.  Like Mr. Pellegrini (formerly of Paulson & Co) said recently: “It is a time of risk management rather than real decisive positioning”.

We propose that the best defense for this environment is offense.  Having a plan, a systematic strategy for how to rebalance assets and look for opportunities across the spectrum of financial assets and across the globe strikes us as the real best defense.  Focusing on risk management without an approach like ours at Covert Analytics, is a bit like driving with the parking brake on. As former portfolio managers we know what can occur without a systematic strategy, something we like to call “Asset Allocation Paralysis”.  We coined this term to describe what happens when a portfolio manager is unconvinced whether a market is overbought or a good opportunity, whether to sell a legacy position or maintain it, whether to increase Equities or not.  The uncertainty of making aggressive portfolio bets ends up causing inactivity, and the end result is a portfolio sailing through treacherous waters like a ship without a sail.

Posted in Asset Allocation, Bonds, Dynamic Rebalancing, Stocks | No Comments »

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