Turbulent markets are an unnerving time for investors, but they also present opportunities for the brave. The dividing line between brilliance and foolishness is razor thin, and determined by what markets decide to do after you have made your decision. You often have to wait for months before you know for sure.
Share charts are an extremely important tool in times like these. While I am no expert at technical analysis, before I buy or sell a share I make sure to look closely at charts of major indices as well as those of the security to see where trend points, support and resistance can be found.
What the charts seem to be showing, at the time of writing is that we have yet to see the kind of capitulation sell-off which would be required to put a long-term floor under share prices. While we are getting rallies, they are petering out in two or three days, and are being used by bargain hunters to take a quick profit. There is as yet no catalyst for a change of mood.
However, a more anecdotal measure is more encouraging. This is provided by my “BBC-ometer”. Normally, the BBC provides only scant coverage of stock markets. It usually takes months of bad news before share prices start to work their way up into the major headlines. I can imagine the editorial meetings, at which the old guard of news hands are gradually won over by ever-more pressing problems.
This week though, the troubles of Bear Stearns, and even the better-than expected results of banks like Goldman Sachs have made it onto the one o’clock radio news, with full analysis and explanation. My rule of thumb, perhaps a little unfair these days, is that once the BBC has really woken up to some financial news, it is probably nearly over.
For the moment though, I have been adding only lightly to my shareholdings, and keeping a cash level close to 50 per cent. Although I have a broad holding of banks, most of these shares were picked up by open orders to be triggered by bargain prices. In many cases I have lightened holdings or sold completely on rallies. Of my longer-term holdings, I have been disappointed by Sainsbury, which has fallen by more than 10 per cent since purchase. At £5.72bn, the company’s market capitalisation is £3.6bn less than the book value of its land and supermarkets. While these sites may perhaps be worth less now than when Sainsbury was defending itself against an unwelcome bid, these are the most durable of commercial property values given the planning difficulties of getting new stores.
Likewise I was disappointed that Aim-listed Inspired Gaming, in which I had recently increased my stake, is having worse than expected trading in its pubs division. This division is a legacy outfit, whose prospects are far less exciting than the fast-growing gaming and leisure divisions. The market reaction was severe, chopping the share price by a quarter from 210p to 160p, a magnification which says everything about market nervousness and not much about the prospects of the company.
These, however are sideshows compared with the hedging exercise which I described last month.
This was achieved through the purchase of an exchange traded fund listed in the US, the ProShares Ultrashort S&P500. As its name suggests, it is an inverse fund whose value rises as the index it tracks falls.
Since I purchased my holding in January, the S&P 500 has fallen by over 100 points, and the ETF has, through gearing, delivered double that hedging benefit. As a result, I am now showing a 5 per cent year to date positive performance on my U.S. portfolio, which is enough to give me a 4 and 5 per cent out-performance for the portfolio as a whole against the FTSE 100 and S&P 500 respectively.
Nick Louth is an active private investor, writing about his own investments. He may have a financial interest in any of companies, securities and trading strategies mentioned.
