Stock market volatility - getting used to it

Diary of a private investor: politicians have us in their grip

Once you become acclimatised to the market turbulence, the investment game is still worth playing.

German Chancellor Angela Merkel, Greek Prime Minister George Papandreou and French President Nicolas Sarkozy Photo: Reuters

By James Bartholomew

2:00AM BST 01 Oct 2011

Stock market volatility has been going on so long that one is almost getting used to it. It is the peacetime equivalent of living through a war and getting accustomed to siren wails. A share of mine drops 4pc and the next day falls another 7pc. Nothing unusual about that. If I can't take it, I should go and get treated for shell shock.

Often people who write in newspapers adopt a persona and, in particular, a confidence that is not genuine, let alone justified. Actually, most of us do not know what is going to happen. And in our personal investments and other financial decisions, we make mistakes like everyone else. Investment is living with uncertainty – knowing you will get it wrong some of the time but reckoning the game is still worth playing.

There is certainly no need to think that everyone but you is doing fine in the current crisis. I got the following email from a former chief investment officer of a major fund manager who now looks after his own money: "I am doing badly. I sell the wrong stocks, hold onto the wrong stocks and bottom fish in the wrong stocks." I know how he feels.

A couple of months ago, when the current crisis of confidence began, I sold off some of my shares in Telecom Plus, a utility company. I reasoned that people had been pushing the price up because it was a relatively safe bet in uncertain times but really the shares were now somewhat overrated. I sold when the shares had fallen a little and they have since risen, even above the level in July – a magnificent outperformance. Thank goodness I sold only a minority of my holding.

Right now the outlook for the markets seems to depend more on politicians than I can ever remember it doing before. They are often referred to on radio and television as "leaders", which I am beginning to find slightly risible. It is apparent that this bunch of "leaders" firstly does not really know what to do and secondly, to the extent that they have got ideas of what to do, their ideas are all different. It has a bit of a feel of the doomed Weimar Republic.

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Of course it is not surprising that nothing can easily be done when the euro is a single currency without a single country running it.

Nevertheless, at any moment an announcement could conceivably be made which will overcome the widespread fear and distrust. If that happens, the market could rise so fast that you would not be able to get any money into it. But if the "leaders" continue to dribble out half-hearted rescues that don't work, the market could fall further. It's up to those "leaders".

Despite all the uncertainty and volatility, I have been buying some shares in the past month, bringing my cash down from about 14pc of my portfolio to 10pc.

One notion of mine has been to secure some of the fabulous dividend yields that are currently available. I half-think "forget about the share prices, just focus on the whopping dividend income".

Apparently investors in the United States have had the same thought and have been buying into exchange-traded funds (ETFs).

ETFs are funds you can buy and sell like shares and give you exposure to a particular kind of investment – like gold, or a whole stock market, or whatever.

There is an equivalent one in Britain called iShares FTSE UK Dividend Plus, but it might be better to buy directly into big companies with handsome prospective yields, such as Vodafone (5.8pc with the price at 164p), Shell (5.2pc at £20.27) and British Land (5.5pc at 490p).

At least one piece of good news has turned up. It now looks likely that the Bank of England will finally put in place some quantitative easing either this month or next.

The minutes of the Monetary Policy Committee openly raised the possibility last month and one of the members has said he almost voted for it then.

Some people have objected in the past that there is a danger it could fuel inflation. But wage inflation is dormant and commodity prices have now fallen back.

I am particularly aware of this since I have shares in a zinc mine and the price of this estimable metal has slipped from $1.12 in July to 86 cents earlier this week. Ouch!

http://www.telegraph.co.uk/finance/personalfinance/investing/shares-and-stock-tips/8798796/Diary-of-a-private-investor-politicians-have-us-in-their-grip.html

After Selling Stocks, 'Wait for Capitulation': Strategist

By: Patrick Allen

Published: Thursday, 11 Aug 2011 

CNBC EMEA Head of News

Having gotten out of stocks in April this year, one strategist is warning investors not to increase exposure to them until "the real selling capitulation takes place," and gold and the Swiss Franc begin to decline.

“We think that the markets are overreacting in terms of economic slowdown,” Bruno Verstraete, the CEO of Nautilus Invest in Zurich told CNBC on Thursday. “The biggest fire is still Europe. It would only be logical to see more triple-A downgrades.”

“The European storm will only stop when Germany is willing to accept a higher yield and lower rating. Euro bonds will be the sole savior,” said Verstraete.

The big question is whether the current market volatility and selloff is a sign of a meltdown for the system, but Verstraete believes the Chinese could come to the rescue.

“Is there a risk for a system meltdown? Yes, but rather limited as it is a universal problem and so far China has not really helped out its customers a lot," he said.

Given the currency reserves they have at hand, their firepower is a multiple of that of the European Central Bank, Verstraete said.

Having watched events in Europe and the debt ceiling talks in Washington, Verstraete believes much of the current uncertainty has been manufactured by the politicians.

“They all say it is time to act," he said. "The market does…only faster."

RELATED LINKS

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© 2011 CNBC.com

http://www.cnbc.com/id/44070567/After_Selling_Stocks_Wait_for_Capitulation_Strategist

Correction: CNBC Explains

Published: Friday, 5 Aug 2011 

By: Mark Koba
Senior Editor

A correction may sound like it means something is getting 'fixed' on Wall Street, but actually it's a word used to describe both a trigger for financial losses, as well as buying opportunites for investors.

Timothy A. Clary | AFP | Getty Images A concerned trader on the floor of the New York Stock Exchange.

So what is a correction? How does one come about? What does it mean for the stock market? CNBC explains.

What is a correction?

A correction is a decline or downward movement of a stock, or a bond, or a commodity or market index.

The amount of the decline is at least 10 percent and a true correction exceeds that amount.

In short, corrections are price declines that stop an upward trend.

Why do corrections happen?

Stocks, bonds, commodities, and everything else traded on the markets never move in a straight line, either up or down. At some point their value will change—for better or worse.

When stock or bond prices go up, it may seem like there's no end to how high they can go. When this happens, stocks or bonds become 'overbought.' That means some investors will try to buy into the rise of stock prices with the hope of making profits before a downward trend begins.

But as they do buy in, the investors who bought earlier—helping to push the stock or bond price up—will consider selling when they think the price is near a peak. Investors might base their thinking on an earnings report for a certain stock that shows flat profits, or a belief that a certain industry will face trouble. Any kind of 'bad' news can trigger a sell-off.

And sometimes, investors will simply take profits as the market heats up. In either case, the selling pressure drives prices down.

How long do corrections last?

Corrections generally last two months or less. They usually end when the price of a stock or a bond 'bottoms out'—for example, some will point to a stock reaching a 52-week low—and investors start buying again.

How is a correction different from a bear market or "capitulation"?

A correction is shorter in length and generally less damaging to investors than a bear market. A bear market happens when equity prices keep falling and investors keep selling into a downturn of 20 percent or more for the overall market.

The difference between a capitulation and correction is simply that a capitulation is more severe. A capitulation  , is said to occur when investors try to get out of the stock market as quickly as possible. It's also described as panic selling. Capitulation usually is based on investor fears that stock prices will plunge even further than the current low levels.

Bottoms—or the lowest price for a stock or market index—are formed more quickly in corrections than in capitulations.

Is a correction good for the market?

Many investors and analysts look at corrections as a necessary 'evil' to cool off an overheated stock or bond market. This is to prevent a huge sell-off or 'bubble burst,' as what happened with Internet stocks in 2000-2001.

It's believed that corrections adjust stock prices to their actual value or "support levels," and so, are not overpriced or inflated.

Many short-term investors look at corrections as a buying opportunity when the stock or the overall market has reached a bottom or the lowest price level. Their buying helps push the price back up and stops the correction.

What is an example of a correction?

Corrections are fairly common. We can look at the S&P Index to see one.

As the chart below shows, the S&P 500 closed at 1,363.61 on April 29, 2011, its highest level since June 5, 2008.

On Thursday, Aug. 4, 2011, at 11:26 a.m. ET, the S&P 500 hit a low of 1,225.95, entering “correction” mode, defined by a drop of 10 percent or more.

© 2011 CNBC.com

http://www.cnbc.com/id/44033215/Correction_CNBC_Explains

Capitulation: CNBC Explains

By: Mark Koba

Published: Thursday, 4 Aug 2011

Senior Editor

Traditionally, the word capitulation describes a surrender between fighting armies. What is capitulation when it's used on Wall Street? What does it signify? We explain.

cnbc.com

What is capitulation?

In simple terms, capitulation is when investors try to get out of the stock market as quickly as possible and look for less risky investments. It's also described as panic selling. It's usually based on investor fears that stock prices will fall further than they have.

Capitulation is usually signaled by a decline in the markets of at least 10% in one day.

In getting out of the market, investors give up any previous gains in stock price. That means they take a financial loss, just to get out of stocks. The thinking is: take a smaller loss now rather than a bigger one later.

Real capitulation involves extremely high volume—or high numbers of traded shares—and sharp declines in stock prices.

Why do investors capitulate?

Suppose a stock starts dropping in price. There are two choices. Investors stick it out and hope the stock begins to appreciate—or they can take the loss by selling the stock.

If the majority of investors decide to wait it out, then the stock price will probably remain stable. But if the majority of investors decide to capitulate and give up on a stock, they start selling and that starts a sharp decline in a stock's price.

Are there any benefits from capitulation?

Only for those buyers ready to swoop in.  After capitulation selling, common wisdom has it that there are great bargains to be had in the stock market. Why? Because everyone who wants to get out of a stock, for any reason, has sold it. The price should then, theoretically, reverse or bounce off the lowest price of the stock.

In other words, some investors believe that capitulation is the sign of a bottom and a chance to get stocks at a cheaper price than before the capitulation took place.

Is capitulation a way to gauge the markets?

Not at all. Capitulation is very difficult to forecast and use as a way to buy or sell stocks. There is no magical price at which capitulation takes place. Certainly during the trading day, stock prices and volumes are monitored and some measurement is used to determine if a capitulation is taking place and will remain so at the end of the day.

But most often, investors and market watchers look back to determine when the markets actually capitulated and see how far stocks have fallen in price for that one day of trading.

When have there been capitulations?

The stock market crash of 1929 that helped lead to the Great Depression, is a capitulation. In fact, it had more than one day of it.

On Oct. 24, 1929—what's known as Black Thursday—share prices on the New York Stock Exchange collapsed. A then-record number of 12.9 million shares was traded.

But more was to follow. Oct. 28, the first "Black Monday," more investors decided to get out of the market, and the slide continued with a record loss in the Dow for the day of 38 points, or 13 percent.

The next day, "Black Tuesday," Oct. 29, 1929, about 16 million shares were traded, and the Dow lost an additional 30 points.

More recently, there was a massive sell off or panic selling of stocks  on Oct. 10, 2008, in what can be considered a capitulation. Not only U.S. stocks, but global markets had major declines of 10 percent or more on one day.

Investors flooded exchanges with sell orders, dragging all benchmarks sharply lower. It's believed fears of a global recession and the U.S. housing slump sparked the sell-off.

© 2011 CNBC.com

http://www.cnbc.com/id/44022035/Capitulation_CNBC_Explains

CANSLIM (CANVLIM) - Growth Investing

Investing Heroes

Forget buy low and sell high, says William O'Neil

Noreen Rasbach

Published Thursday, Feb. 18, 2010 6:07AM EST

Last updated Thursday, Feb. 18, 2010 7:39AM EST

Globe Investor will be running profiles of prominent investors and exploring their investing strategies in its Investing Heroes series. We started with an interview with Stephen Jarislowskylast week. This week's article profiles William J. O'Neil.

Investment guru William J. O’Neil’s resume is an impressive read – at 30, he was the youngest person ever to have a seat on the New York Stock Exchange; his How to Make Money in Stocks is a growth-investing classic, selling more than a million copies; he founded the U.S. brokerage firm William O’Neil + Co., and he also started the business newspaper Investor’s Business Daily.

Those successes are largely based on a stock-picking system he designed that identifies stocks that are likely to rise in price and have a high potential for profits, although he gave his system a name -- CANSLIM -- that sounds more like a new diet than a guide to investment success.

Last week, the American Association of Individual Investors named CANSLIM the top-performing investment strategy from 1998 to 2009, which included the recent financial crisis. The non-profit group tracked more than 50 investing methods over 12 years to see how they would fare. CANSLIM returns over the 12 years showed a total gain of 2,763 per cent – compared with the S&P 500’s 14.9-per-cent increase. That averages out to about 35.3 per cent a year.

The system is anything but simple, but Mr. O’Neil said in a statement after the AAII results were announced that “it is possible to invest successfully if you are willing to study hard and learn from history.”

Learn to Time the Market

Hard work is key (there is a great deal of quantitative analysis involved in picking stocks using this system) – and so, too, is accepting some of Mr. O’Neil’s most controversial advice. For example, forget the adage buy low and sell high (it’s “completely wrong,” he writes) and stop looking for bargains. 
“What seems too high in price and risky to the majority usually goes higher and what seems low and cheap usually goes lower.”

Another contentious point he makes is that individual investors can and should learn to time the market – in fact, the M in CANSLIM is predicated on it.

Mr. O’Neil’s first rule for investors has nothing to do with buying stocks. He says that investors must know when to sell and cut their losses.

Investors, he writes in his second book 24 Essential Lessons for Investment Success, “find it gut-wrenching and hard to admit” they were wrong when a stock loses money, but they must overcome that emotion and sell anyway – an essential move if a stock has lost between 7 and 8 per cent from your purchase price.

In fact, the entire CANSLIM system is predicated on taking the emotion out of investing and letting history be your guide.

Here’s a brief description of how it works:

C and A are for earnings

Current and annual. Mr. O’Neil writes that the stocks you pick should show a major percentage increase in current quarterly earnings per share – using the most recently reported quarter – when compared to same quarter in the previous year.

The reason for this, he says, is that historically, stocks that begin to soar show a 70-per-cent increase in current earnings before those major advances.

As for annual earnings, Mr. O’Neil believes that annual share-profit growth should be at least 25 per cent for you to consider buying a stock, that next year’s consensus estimate should indicate even higher growth -- and that the stock should have grown significantly in each of the past three years.

N is for new

There should be something new in the industry – a new product or service or management. Something that can propel it forward.

S is short for supply and demand

Really, he should have used a V for volume, but CANVLIM wouldn’t have the same ring to it. Mr. O’Neil believes you should track the volume of a stock to see whether people are buying or selling it. Also, the larger the number of shares outstanding, the harder it is to budge the stock – to get a really large price increase.

L is leaders and laggards

Pick stocks of companies that lead their industry, not so much in size but in quarterly and annual profit growth and a product that is gaining market share.

I stands for institutions

How is the stock perceived by mutual funds or pension plans? Mr. O’Neil’s rule of thumb is that a stock should be in the portfolio of at least 10 institutions, and some of these should be organizations will better-than-average performances.

M is for market direction

Three quarters of stocks follow the market’s trend, so it’s important to know which way it’s headed. His book How to Make Money in Stocks outlines how to time the market using, among other things, daily price and value charts of the key market indexes.

Although CANSLIM is a detailed, somewhat complicated system, like all growth investing it places an emphasis on using earnings as a metric.

“Growth investors do not tend to focus on asset values, they focus primarily on earnings growth potential – future earnings per share,” says Prof. Eric Kirzner, a finance professor at the University of Toronto’s Rotman School of Management. “And companies whose rate of return on new investment exceeds their cost of capital.”

By comparison, value investors concentrate on asset values and on price versus value. “If you look at a good value-investor portfolio, it often has very few, if any technology companies, because technology companies tend to be future-earnings focused and not brick and mortar-type companies.”

More on value investing: These fund managers bought, held, prospered Value investor guru's strategy still works Value investing thrives after market meltdown Graham's strategy still stands tall Fund lessons from Bill Miller

Prof. Kirzner also says that growth stocks are often characterized by high price-to-earnings, high price-to-book and high price-to-sales metrics, all of which are the value investor’s nightmare.

“Value investors are absolute – the most important criteria is, are you buying the stock at a bargain?” he says.

Howard Lindzon, a Canadian-born entrepreneur who runs the web company StockTwits and manages a hedge fund, is a self-described “big fan” of Mr. O’Neil’s. Mr. Lindzon, who is a growth investor, says How to Make Money in Stocks “was one of the first books recommended to me” and he was tremendously influenced by it. He also is an avid reader of Investor’s Business Daily, which “helps me to focus in on trends and what stocks I want to own.”

His own system for choosing stocks is more of a hybrid, he says, but adds, “I definitely try to own companies that would qualify for CANSLIM.”

http://www.theglobeandmail.com/globe-investor/investor-education/forget-buy-low-and-sell-high-says-william-oneil/article1471282/page1/

http://www.theglobeandmail.com/globe-investor/investor-education/forget-buy-low-and-sell-high-says-william-oneil/article1471282/print/

Capitulation

What Does Capitulation Mean?
When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into less risky investments. True capitulation involves extremely high volume and sharp declines. It usually is indicated by panic selling.

The term is a derived from a military term which refers to surrender.


Investopedia explains Capitulation
After capitulation selling, it is thought that there are great bargains to be had. The belief is that everyone who wants to get out of a stock, for any reason (including forced selling due to margin calls), has sold. The price should then, theoretically, reverse or bounce off the lows. In other words, some investors believe that true capitulation is the sign of a bottom.


Read more: http://www.investopedia.com/terms/c/capitulation.asp#ixzz1ZsUZ26of