Cycle Analysis and The Stock Market

When we talk about cycle analysis we will definitely think of WD Gann, the legendary stock and commodity trader who had made tons of money from the financial markets. It was estimated that in his lifetime he made $50 million from stocks and commodities. Imagine how much is $50 million 80 years ago translated to today's money. What was his secret?

He had the ability to forecast the market by studying the historical prices. He said, "Everything works according to past cycles, and that history repeats itself in the lives of men, nations and the stock market." (more quotes from him)

In 1928 the year before the crash he successfully predicted the crash in 1929 and said that it would take years for the stock market to recover. You may read his detail prediction  here.

Today I want to talk about one of his famous theory on the cycle analysis, its known as the Decennial Cycle or the 10 year cycle. According to Gann, he compiled the past 100 years of price data and put them on a chart. He plotted the y-axis as the price while the x-axis as the year ending with 1,2,3,4,5,6,7,8,9,0. The actual chart was very blur as it was a very old chart, so I try my best to illustrate on the chart below:

From the above chart, we can see that the year that ends with 1,2,3 such as 1981, 1982, 1983, 1991, 1992, 1993 and 2001, 2002, 2003 have a similar price pattern, they start from low price levels. Year that ends with 7 or 8 usually experience crashes.

Below is an extract from Gann's teaching:

Each decade or 10-year cycle, which is 1/10th of 100 years, marks an important campaign. The digits from 1-9 are important. All you have learn is to count the digit on your fingers in order to ascertain what kind of a year the market is in.

No.1 in a new decade is a year in which a bear market ends and a bull market begins. Look up 1901, 1911, 1921, 1931...

No.2 or the second year is a year of a mirror bull market, or a year in which a rally in a bear market will start at some time. See 1902, 1912, 1922...

No.3 starts a bear year, but the rally from the second year may run to March or April before culmination, or a decline from the second year may run down and make bottom in February or March, like 1903, 1913, 1923...

No.4 or the fourth year, is a bear year, but ends the bear cycle and lays the foundation for a bull market. Compare 1904, 1914, 1924...

No. 5 or the fifth year is the year of Ascension, and a very strong year for a bull market. It can be a new bull market or a big correction in an existing uptrend. See 1905, 1915, 1925...

No. 6 or the sixth year is a bull year, in which a bull campaign which started in the 4th year ends in the fall of the year and a fast decline starts. See 1896, 1906, 1916, 1926...

No.7 or the seventh year is a bear number, and the seventh year is a bear year because 84 months or 84 degree is 7/8 of 90. See 1897, 1907, 1917, 1927...

No.8 or the eighth year is a bull year. Prices start advancing in the seventh year and reach the 90th month in the eight year. This is very strong and a big advance usually takes place. Review 1898, 1908, 1918, 1928...

No.9 the highest digit and the ninth year, is the strongest of all for bull markets. Final bull campaigns culminate in this year after after extreme advances and prices start to decline. Bear markets usually starts in September or November at the end of the ninth year and a sharp decline takes place. See 1899, 1909, 1919, 1929...

No.10 the tenth year, is a bear year. A rally often runs until March and April; then a severe decline runs to November and December, when a new cycle begins and another rally starts. See 1910, 1920, 1930...

This is just one of the cycle theories, there are also the Presidential cycle (4 year cycle), secular bull and secular bear, yearly cycle, monthly cycle and many more. From the study of past cycles, we see a very clear picture that history seems to repeat itself and by learning more technical analysis theories we can make better investment decision to help ourselves to grow our wealth.

Finally, I'm going to end this article with a statistical table to show how accurate is this theory:

Happy investing,
Pauline Yong

Is the Eurozone Crisis Bottoming?

In ECB President Mario Draghi's words: "The worst is over for the EU crisis, but risks remain!". He was refering to the low inflation registered in the EU region. As long as the inflation is kept below 3%, the ECB is happy at keeping the benchmark refinancing rate and the deposit rate unchanged at 0.75% and 0% respectively, and the ultra low interest rate will spur economic growth in the EU.

However, not many economists share the same view with Draghi. 

A London professor of economics, Costas Lapavitsas said:

"This misleading impression has been created by Mario Draghi of the ECB, who announced that he will lend freely to countries in trouble, driving interest rates down. There has been virulent opposition, led by the Bundesbank. For conservative German opinion, Draghi is the devil of Goethe's Faust, luring Angela Merkel into a deadly pact of inflation. Also for ECB lending to materialise, a country must accept tough austerity conditions. Which European politician will do that?"

Indeed, the austerity condition has already caused social unrest in Greece, Spain and other EU countries to go on strike in the streets as spending cuts tend to affect lower income groups, especially when the cuts are to welfare payments.

In addition, the fiscal union is not easy to realised as that would means centralised control of national budgets and tax policy in the Eurozone. Germany is the main driver behind the fiscal union as they want to make sure other EU countries do not overspend if they want to use the German's money! 

We have already seen at the current European Summit that France and Greece are opposing the idea of fiscal union, they want "solidarity" to balance the budget austerity demanded by Germany. 

Hence, the actual solution is not whether the interest rate is low enough to stimulate growth in the economy, it's the "confidence" that matters most. In order to judge whether the Euro crisis is over depends on how each of the EU members cooperate with one another, minimise their conflicts, and to reinstate the confidence back to the economy. 

What Does QE3 Mean?

Someone asked me QE3 announced during the market peak, will the stock price go higher?

To answer the question, let us understand what QE means. QE stands for Quantitative Easing. It is a kind of monetary policy that increases the money supply in the financial institutions, so that the financial institutions have more funds at lower cost for lending.

The key here is "more lending", so that consumers borrow money to spend and firms borrow money to invest, all these will drive at more economic activities and finally reflects in the GDP figures.

Hence, whether QE3 will work depends on the willingness of the consumers and producers to borrow money to expand their economic activities. Let's take a look at the following charts:

The first chart is the US consumer confidence index. We can see the general improvement in the confidence level in the consumer sector.

However, the US business confidence (Chart 2) is rather weak with figures below 50 for the last 3 months.

This may mean that the QE3 of US600 billion of fresh funds may not reach the desired result that the US government wants.

So does that mean we shall stay on the sideline and keep our money in the bank? No! Because your money in the bank will lose purchasing power as the bank rate is negligible. We should invest in dividend stocks and income generated assets such as REITS or even properties.

Recently, I took advantage of the sell down in the KLCI by re-balancing my portfolio. I cut loss on non-performing stocks and switch to dividend yielding stocks. Immediately I see my portfolio appreciated 4% within a week.

Currently, all major indices are pointing at bullish trends, however do take note that the US market has been in an uptrend since June, the next resistance for the S&P 500 is 1480. As for our KLCI, you may want to take into consideration of our election risk, and switch to dividend stocks or REITS.

Happy Investing!

Irreversible Euro

During the ECB press conference last Thursday August 2nd, Mario Draghi, the President of the ECB, mentioned that the Euro is 'irreversible'. A media reporter asked him what did he mean when he said 'irreversible'? Mario spoke in a firm and clear tone, "when I said irreversible it means Euro can never go back to lira or drachma, it is here to stay for ever!"

Through out the whole Q&A session, he answered many questions on bond purchase and financial aids for the Eurozone, but it is nothing compared to the above statement about Euro dollar sent a very strong signal that whoever think Euro is going to collapse, will need to think twice!

The next day, DJI soared 2% and subsequently other Asian markets rebounded on Monday. Whether this rally genuine or not depends on the following factors:

- Corporate earnings - As we've come to the earnings season in August, what drives the market very much depends on the individual corporate earnings. If economies are recovering, we should see better corporate earnings.

- Economic data - GDP figures from the major countries such as the Eurozone, US, and China will indicate the financial health of the economies that in turn affect the stock markets. So far these figures have been weak, confirming economic slow down globally.

- Government effort - So far since the financial crisis in 2008, governments around the world are the true followers of the Keynesian philosophy, not only that, they went beyond it - they use the last resort of printing money to finance their fiscal stimulus! And amazingly, prices for these money printing countries have been able to keep low. Does that sound like the lost decade- Japan? Remember, inflation arises when people are spending, or when too much money chasing too few goods. Obviously that did not happen or may be not yet because the consumer and business confidence are still weak.

In the end, these governments who spent huge stimulus to artificially shore up the economy will need to reconsider this option. They need to think about these questions:

1. If interest rates are already low, how can we further stimulate the economy with monetary policy?

2. If monetary policy is not working, can we use fiscal policy to stimulate the economy?

3. Then the next question is: How do we finance the additional fiscal spending? By borrowing more money (debt level already high) or by printing more money? Borrowing more money will lead to higher debt level which jeopardise the valuation of the currency and credit rating. How about printing money? Firstly, printing money is inflationary. In addition, printing money will lead to inflationary asset bubble and the depreciation of the currency as well.

Since in the periods of recession, monetary policy generally doesn't work well, the best measure is still fiscal policy. But this has to be finance within your means, and make sure allocation of funds is towards the improvement of labour skills and the efficiency (or productivity) of the work force, rather than constructing white elephants projects or spending money on unnecessary infrastructures that do not drive long term growth for the economy.

Below is the chart of the S&P which shows an ascending triangle is forming, if S&P could break 1400 level, there is a high chance of reaching the next target level of 1500.

KLCI At Historical High

KLCI recorded another record high of 1629! As we can see from the chart above, there was a reverse head and shoulder formed during the period of April to mid June 2012. On June 19th, there was a breakout from this bullish chart pattern and now heading towards the price target of 1646.

While technical analysis tells you the possibility of near term price action, in a larger picture, we still rely on the fundamentals to give us a glimpse into the future.

The Euro debt crisis is still on, the politicians have not come up with the best solution yet. The concern is the bond yield (or the cost of borrowing) for Greece, Span and other debt ridden countries are much higher than their counterparts like Germany, Sweden and Denmark. For example, the 10 yr bond yield for Germany is below 3% while Spain is closed to 7%. It is believed that those debt ridden countries cannot survive with such high cost of borrowing and that they are suggesting the richer EU countries like Germany and Denmark to share the weaker countries debt burden by jointly issuing government bonds. By doing so, the borrowing cost of Spain and Greece is lowered while that of the Germany is raised.

During the recent Brussel Summit in June the above proposal did not materialized but instead a temporary measure is agreed upon. That is the 120 billion euros growth package was agreed upon during the 2 day summit with funding from the ECB to help solve the problem temporary.

In the US, concern is with the unemployment data that remain stubbornly high at above 8% but it is declining which is a good news for the US. In addition, the corporate sector is generating huge profits as products such as Microsoft, Apple, Johnson & Johnson etc are selling all over the world!

On a contrary, things are not looking good in China. Recently the Chinese data shows that the economy is contracting with weaker PMI and GDP data.

Hence we shall expect the markets to remain choppy until the situations get better in the EU and China.

Happy investing,
Pauline Yong

Sigma Wealth Stock Analysis Advance Course

Last weekend we had just completed a 4 day stock analysis course. It was overall a comprehensive learning experience for the participants as they learn about economics, ratio analysis, intrinsic value, value investing, charts and patterns, price and volume analysis, Dow theory, Elliott Wave, Fibonacci support and resistance, market sentiment indicators and more!

What a list! Yes, we covered so much in just 4 days, of course, we have all the follow ups through our exclusive facebook "secret group" - only for the graduates, to discuss our daily trades and so that we can all make money together! Also, I've to thank Iqbal for coming all the way from KL to attend our seminar in Johor Bahru!

Here are some of the graduates comments:

"This course provides me a bigger pictures of how the stock market works and an in-depth analysis of stocks performance. I'll recommend friends to join this course as it transforms me from a novice into a knowledgeable investor. Lecturer is helpful and willing to share." Dickson Tan

"This course is useful for my future trading and investment!" Iqbal

"This course helps us to understand the fundamental and technical side of stock analysis, very useful for my trading!" Tan Teng Huat

"Overall the course covers a lot in the given time. Most other trading course do not include Fundamental Analysis, which I think is important to know. Value for money!" Joshua Lim

Our next intake is August 25 & 26, Sept 8 & 9. Interested please enquire through email: info@stocktips123.com or call Ms Teh at 012-7795292.

Where Are We Heading To?

Where is our KLCI heading to?

Everyone is asking this multimillion dollar question!

In order to answer this question, we must first look at the S&P 500 chart, as that will determine our market in the near term. According to the above chart, we are at the cross road whereby the S&P is below the 50 day moving average but was supported by the 200 day moving average. This spells some uncertainty over the market in the short term. Now we have to observe for the next 2 weeks whether we can stay above both 50 day and 200 day moving average, if yes, it means the bull trend continues. However, it S&P 500 breaks below these two moving averages, it means we have the "death cross", which is bad news for our KLCI as well.

Of course, we must not forget the Greece re-election is around the corner, this Sunday, as all eyes will be on the outcome whether the New Democratic Party (New Democracy, in support of the euro zone) and the radical left-wing coalition (Syriza, left-wing, opposed to rescue) will win?

Happy investing,
Pauline Yong