What to do when insiders sell

GREG HOFFMAN

March 22, 2010 - 1:19PM

CSL's McNamee sells down. Should you?

Last week, CSL chief Brian McNamee announced the sale of $8.4 million worth of his shares in the company, amounting to about one sixth of his total holding. There is no doubt that this is a significant sale. How CSL shareholders interpret its significance is less certain.

At times I have regretted not following the insiders' moves after holding on to my stock. Equally, there have been occasions where the share price has surged after sales like McNamee's. There is simply no clear-cut rule to follow when an insider in a stock you own disposes of a large parcel of shares.

But there are two key questions to ask when considering such sales, the answers to which might provide some guidance for you:
1. Is the stock expensive?
In January 2008 The Intelligent Investor published an analysis of then-darling stock Reverse Corp (which offers the 1800-REVERSE service). Our analyst noted the combination of an expensive-looking stock price and sales by founder and executive director Richard Bell. We suggested investors steer clear and shareholders follow Bell's lead. The stock price is now down 95%. But how does CSL fare on this score?

Coincidentally, the same analyst who pulled apart Reverse Corp also covers CSL for The Intelligent Investor. Almost two years to the day after issuing his negative view of Reverse Corp, he recommended CSL to our members at $31.30 per share.

That price, Nathan Bell explained, was ''reasonable for such a high quality business''. Even though CSL shares have risen by 15% since January, we don't believe the overpriced condition applies in this case.

2. Is this a series of sales by the same director or, more importantly, sales by multiple directors?
Between October and December 2007 we noted nine sales by six individual directors of Roc Oil, at prices between $2.95 and $3.43. The share price today stands at 36 cents.

In CSL's case, the previous director sale came from Ian Renard in August last year. To find the next most recent sale, you have to go back to McNamee's previous sale in April 2007.

To me, this record is clean enough. McNamee is not a serial seller (at least, not yet) and nor are his fellow directors.

When looked at in this light, McNamee's sale shouldn't send waves of panic through CSL's share register.

But insider sales should always be taken seriously, even if they don't necessarily prompt a sale in your own portfolio. Director sales are not always a bad sign but they're never a good one. To wit, if you've had your CSL shares in the bottom drawer for a few years, it may be time to move them a little closer to hand and follow the story a little more carefully.  

If you're interested in following share purchases and sales, the free site Directors' Transactions (run by The Intelligent Investor) is designed to help you do exactly that.

Greg Hoffman is research director of The Intelligent Investorwhich provides independent advice to sharemarket investors

http://www.smh.com.au/business/what-to-do-when-insiders-sell-20100322-qq13.html

Do not underestimate the value of due diligence

If and when you decide to pursue investing or whatever your fancy, do not underestimate the value of due diligence.

Look through each and every financial statement you can get your hands on, including the detailed notes.

If you just read the annual reports of companies, you will have done more than 98% of investors.

If you read the notes of the financial statements, you will be ahead of 99.5%.

Verify those financial statements, as well as future projections announced by the top executives, by doing your own legwork.

Talk to customers, suppliers, competitors, and anyone else who might affect the company.

Do not invest unless you can say with absolute certainty that you are more knowledgeable about his particular firm than 98% of the analysts!

What you need to make to recover your losses

What you need to make to recover your losses
Cost    Loss    Price   Return
price   (%)     After   required (%)
                loss (%)
$100    5       95      5.3
$100    10      90      11.1
$100    20      80      25
$100    50      50      100
$100    70      30      233
$100    90      10      900
SOURCE: FAIRFAX

http://www.businessday.com.au/news/business/money/planning/sure-and-steady-in-volatile-times/2010/02/02/1264876022132.html

Day Trading – Will You Succeed?

If you read too many websites about day trading, you might be lulled into believing that it’s all incredibly simple. Don’t make the mistake of plunging into any form of day trading without spending the time to learn what you’re doing. And certainly don’t start by investing every cent you posses, including next week’s mortgage payment. Pretend, or paper trade for a little while, make sure you’re earning profits consistently, and then you can start to think about using some of your real money – but only some!

As you practice trading, you’ll find you learn an enormous amount, and once you have a few dollars of your own on the line, you learn a lot more. It’s usually best to start by trading on a longer timeframe, too, so you can master the skills. Learning the technicalities of trading takes time but it’s possible to master it. The tough part is the psychology – how to deal with your own emotions and reactions in trading situations. If you can read up on the psychological side of trading, particularly day trading, you’ll be better equipped to handle situations as they arise.

If you’re serious about day trading, then you will need to find out how much money you need to get started. Different brokers will have different requirements for funding an account. Be aware, too, that it can be tough to make money trading a flat market. As a day trader, that’s even more relevant to you. You need enough movement in the market to provide profitable opportunities.

So what is day trading? Basically, it means online trading of stocks or indices, within a very short timeframe – in this case, for one day or less. Day trading requires you to make accurate assessments of trading situations very quickly, and act upon your decisions instantly. This is not a game for the indecisive or faint of heart. It’s important to know exactly what signals you’re looking for in order to enter a trade, and know your exit strategy even before you buy. Once your exit signals appear, you have to act immediately, not dither and try to second-guess the market.

If you haven’t already worked it out, day trading can be extremely stressful. If you can’t afford to lose all the money you’re investing, or more to the point, if you have a fear of losing any of the money, don’t do it. Your fear will paralyze your decision making at the times you most need to be quick and decisive. You also need to be very self confident, so that when you’ve done your analysis and seen the signals to enter or exit a trade, you’re confident that you’ve done sufficient research and have made the right decision.

Nerves of steel and a dash of raw cunning are part of a day trader’s personality, and so are discipline, determination and a high tolerance for stress. It can be great fun, but can always stress you to the max. Most successful day traders work for large institutions, not for themselves.

http://www.comador.com/day-trading-will-you-succeed/

Why The Foreign Exchange Market Is Different From The Stock Market Report

by Todd Schuyler

Do you want to know the difference between the Foreign Exchange Market and the Stock Market? Find out here on my Forex trading software reviews blog article report.

The foreign exchange market is also known as the forex market. Trading that takes place between two counties with different currencies is the basis for the forex market and the background of the trading in this market.

The main difference between the stock market and the forex market is the vast trading that occurs on the forex market. There is millions and millions that are traded daily on the forex market, almost two trillion dollars is traded daily. The amount is much higher than the money traded on the daily stock market of any country. The forex numbers are astronomical!

What is traded, bought and sold on the forex market is something that can easily be liquidated, meaning it can be turned back to cash fast, or often times it is actually going to be cash. From one currency to another, the availability of cash in the forex market is something that can happen fast for any investor from any country.

The big difference between the stock market and the forex market is this. The forex market is worldwide. The stock market is something that takes place only within a country. The stock market is based on businesses and products that are within a country, and the forex market takes that a step further to include any country.

The stock market has set business hours. Generally, this is going to follow the business day, and will be closed on banking holidays and weekends. The forex market is one that is open generally twenty four hours a day because the vast number of countries that are involved in forex trading, buying and selling are located in so many different times zones.

The stock market in any country is going to be based on only that countries currency, say for example the Japanese yen, and the Japanese stock market, or the United States stock market and the dollar. However, in the forex market, you are involved with many types of countries, and many currencies. You will find references to a variety of currencies, and this is a big difference between the stock market and the forex market. You must get educated on forex because of the many types of currencies involved.

http://www.freefinancialtoday.com/2009/06/11/why-the-foreign-exchange-market-is-different-from-the-stock-market-report/

Strategies to Make Money in The Stock Market

One great way to grow your money is to invest into the stock market. But deciding how to invest into it can be a bit tricky. Everyone is different, but there are 5 strategies that all traders use to make money in the market.

1. Buying and Holding for the Long Term

Everybody knows what buy and hold is. In fact the vast majority of market participants buy stocks and hold onto them for the long term. And it does make sense, stocks do go up over the long term, so buying and holding can be a passive way to grow your money.

2. Trading The Trend

One other strategy is called trend trading. It involves buying stocks that are going up and selling stocks that are not going up. While it might sound like it was invented by a 5 year old it really can work if you get the hang of it. Sometime the simplest answer is the best.

3. Swing Trade

Swing traders use technical indicators to buy and sell stocks in the short term in order to make profit when all is said and done. Any trade that takes over 1 day and has a profit target as well as a stop loss can be considered to be a swing trade.

4. Options

Stock options give investors a way to leverage their money and to make huge returns from the stock market. There is only one problem; they can also give traders huge losses. For that reason it is best to only consider options after you are already profitable trading stocks.

5. Day Trading Stocks

Day trading is exactly what the name suggests. You buy and sell stock within one day in order to make money on the small moves that occur throughout the day. Day traders are not always profitable, but over the long term it can be a great way to make money.

Every strategy has its ups and downs. But it is up to the individual trader to determine which one fits them the best. Learning the basics of each and experimenting with them can help you determine how you want to approach the market.

http://www.freefinancialtoday.com/2010/03/20/strategies-to-make-money-in-the-stock-market/

Strategic Thinking

Those who follow the situation on the stock exchange may have noticed that a lot of strategists are quoted on their vision. When there is trouble people recur to theirstrategic plans; why was it? What are we doing this for? and shouldn’t we change into another direction.

One of the strategist I heard about is Albert Edwards. He is predicting that the return on stocks will diminish. In fact this process is ongoing for some years and he reckons that we have only just started. Edwards is strategic adviser on asset allocation. According to his vision investors should bring down its stock allocation.

This is only one of the advisers. But it shows that investors and companies both need a strategy. Both need somehow the picture and idea of what the economic situation will be and how it will affect the portfolio (for the investor) or the resources and investments (for the company).

The parallel is stronger if you think that many companies do not bother about a strategy as long as the market conditions are fine. Now that the economic situation is changed thestrategic thinking (over the past years) can make the difference.

The problem for both is adaption to change. If the stock prices fall the strategic question is: is this the end of the bear-market or only the beginning. Asset allocation could make a difference. If it is the beginning and allocations to stock are lowered the strategy will make sense, but it could also turn out different and a lower asset allocation will mean a relatively under-performance.

Somewhere I found the remark: “my strategy is stock-picking. There are always stocks that show growth irrespectively of what the market does.” That is also a strategy; not a long-term plan, but an approach, like a way of life.

A similar approach (and parallel) for the company is to focus on a niche market. Like the stock-picker, there is always a niche that will perform independently of the overall market.

In both cases, the strategic benchmark must be set to this target. If you focus on stock-picking the market may offer worse but also better results.

http://strategicplanning.doodig.com/2010/03/21/strategic-thinking/

Buy and hold or Buy and sell: there is a difference in what you look for when you do each type of strategy

Stock Market Training Course

So, you’re ready to buy the first stock and want a stock market training course. The first step in stock trading is finding the right stock to purchase; you need to do research for this. Before you begin looking you need to decide whether you’re going to buy and hold or buy and sell. There’s a difference in what you look for when you do each type of strategy.

Buy and hold is a long-term strategy. You look for stock that gives either dividends or one that has continuous growth. Some examples of the type with dividends are bank stocks. Bank stocks usually do well during times of recession. These stocks, like other value stocks offer dividends that offer better returns than many fixed income instruments. They also offer stability in a time that the economy is not performing it’s best. If you purchase value stocks during a healthy growing economic time, you can get a bargain. Because they are so stable, often purchasers overlook these stocks in favor of stocks that are more glamorous and promise new and rapid growth, like technology stock.

If you pick stocks during a recession where the economy is low and under performing, growth stocks are usually bargains. Be sure that you know the company and the management when you select a stock. Some companies aren’t healthy or strong enough to make through bad times. If the stock you select is a retail store, shop there. See what the store interior looks like and check the number of shoppers. There are many clues that tell you a company is in trouble if you just take the time to look. Many experts that pick winners, sample the products before they buy. Remember, retail stocks and stocks with products you use daily offer that opportunity. If you like what they produce, get excellent customer service or choose their brand over another, chances are you’re not alone. This additional information is not solely the basis for astock pick but help in narrowing the playing field.

Short-term investors buy and sell, just need to look for opportunity when they select stocks. Depending on the style of short term investing you choose, your strategy also varies. The short-term investor that expects a company to increase in value over the next few months, selects stock differently than the day trader that looks for changes in the charts of the stock’s price. If you choose to do very short, day trading type of investing, you need to understand the signs that indicate a favorable purchase or closely track a multitude of stocks and find one that has a reoccurring pattern of predictable dips and rises.

It all sounds very complicated and a lot of work. It is. Most people that do short term trading tie themselves to their computer if the market is open, and spend the evening studying for the next day. That is, unless they use a service that does it for them. There are several stock picking services that analyze the charts and help you pick. Some use very scientific methods and others use a system known only by them. One of the more scientific services uses a stock-picking robot. It’s a program that studies the penny stocks, almost unheard of, and makes recommendations based on the tracking of their prices.

Once your homework is complete and you have stocks to buy, decide the price to dump it. If you do short term investing, releasing the stock is part of the program. Find a percentage that you want to earn and when the price hits that is the equivalent to that percent, sell. Also, choose a price that you sell on the bottom end. This is more difficult since you didn’t enter the market to loose money. Most people that do well in investing cut their losses at appropriate times instead of riding the stock to the grave.

Using Yield Curve To Gauge The Economy Cycle

Using Yield Curve To Gauge The Economy Cycle

Posted by lionel319 @ Sun 21 Mar, 10,

What is a Yield Curve?
Here's the definition from thefreedictionary:-

At any particular time, the relation between bond yields and maturity lengths. The yield curve usually has a positive slope because yields on long-term bonds generally exceed yields on short-term bonds. The shape of a yield curve is influenced by a number of factors including the relative riskiness between long-term and short-term securities and by investors' expectations as to the level of future interest rates.

To make it clearer, let's take a look at the below charts.
(All these yield charts are taken from stockcharts.com)

On the left shows a snapshot of the yield chart on 26th December 2002.
The right side of the chart is the price chart of the S&P500.
Lets focus on the yield chart first.

If you take a look carefully, you will notice that, debts (eg:- bonds, fix deposits, CD, loans, etc ...) which have longer maturity terms tends to have higher yield.
This makes sense. And that is why most of the time, a fix deposit in banks which has a monthly maturity will have a lower yield return than a longer term fix deposit.



Under normal condition (Normal Yield Curve), this is a good, and healthy situation.
When the short term maturity debts have a lower yield compared to a longer term maturity debts, banks could make money from it.
How they do it?
Well, banks can borrow money for the short term with low interest rate, and lend it out for longer term with a higher interest rate. This is call an arbitrage trade, where the banks earns thru the difference between the 2 interest rates.
The money that you keep in banks as fix deposit, and get a 2% interest every month? That is the short term debt that the banks are receiving.
The money that you take to refinance your housing loan, spending across 30-years, with a 5.99% interest rate? That's the long term debt that the bank is loaning out.
Now you get the picture :)



Now let's take a look at the yieldfor year 2007.

Do you see something abnormal here?
The shorter term debt (3-month) is having a higher yield(~5%)  compared to the longer term debt (30-year), with a yield of below 5%.
What does this mean?
This means that, banks can no longer earn money thru the mention discussed above.
This is call an Inverted Yield Curve.
When banks income are thinning, they will do all sorts of funny stuff in order to improve their deteriorating earnings.
And see what happens in 2008, when all the banks collapse.



And so, here's the summary

• During normal yield curve (where short term interest rate is lower than the long term interest rate), this is a healthy state. The economy is at stage 1 or stage 2 (link). This is the best time for long term investors to accumulate stocks.
• During inverted yield curve, the stock market will most probable hitting the top soon (Stage 3 or early stage 4). Long term value investors will hardly find any undervalued stocks during this time.

Let's take a look at a few of the past history's chart:-

The top indicator is a ratio of the 3-month interest rate versus the 10-year interest rate.
Notice that, in year 2000, during the month of July, The 3-month yield is now higher than the 10-year yield (3month:10year yield is above 1.00).
The market has shown signs of topping.
As a long term investors, you should start finding stocks in your portfolio which is very overvalued and sell them.
Because, you know that, when an inverted yield curve is happening, the economy is not far away from collapsing.
And when that happens, the stock market will follow suit.
That will be a very great time for the long term investors to pick on some really great wonderful companies which will be then at an undervalued price.




Here's another time when the Inverted Yield curve happened:-

This was 2 years ago, during year 2007.
Do you see that the above 3month:10year yield indicator is hitting above 1.00 during late 2006?
That's pretty much a good sign that the economy is over blown, and the market is about to make a turn.



Now, Let's take a look at the current yield curve ratio.

During year 2009 to 2010, the 3month:10year yield is almost touching ZERO !
This is a very wonderful time to collect some undervalued wonderful companies' stocks.
I hope you guys did collect some during that period.



Here are a few reference links regarding this topic:-

• Stockchart Animated Yield Curve (link)
• Another blog that talks about using yield curve to time the market tops and bottoms (link)
• Yield curve on Wiki (link)
• The 4 stages of a Market Cycle (link) and (link).
• What the Yield Curve Does (and Doesn't) tell us (link).
• Strengthening the Case for the Yield Curve as a Predictor of U.S. Recessions (link).

http://lionel.textmalaysia.com/using-yield-curve-to-gauge-the-economy-cycle.html

Sure and steady in volatile times - Investing conservatively means selecting good, dividend-paying companies.

By John Collett
February 3, 201

Conservative investing in dividend-paying companies will soften the blow of negative returns

Fund managers know and understand the benefits of capital preservation. They know negative returns are best avoided because of how difficult it can be to just get back to square one.

But ordinary investors probably don't appreciate the maths and the sort of high returns required to recover from losses. For example, a loss of 10 per cent requires a return of 11.1 per cent to get back to square one. A 20 per cent loss requires a return of 25 per cent and a 70 per cent loss requires a return of 233 per cent.

So big losses are likely to take a long time to recoup, which is why investing with an eye to avoiding losses in the first place is so important in growing an investment portfolio.

• That is particularly pertinent to the sharemarket because shares quite regularly lose 5 per cent or 10 per cent of their value and, occasionally, much more. 
• From the bull market peak of November 2007 to the bear market trough of March 2009, Australian share prices fell by more than 50 per cent. 
• While the Australian sharemarket has risen by about 45 per cent from the trough, it remains more than 30 per cent off its all-time high of November 2007.

However, the mathematics of capital losses say that for Australian share prices to return to record levels, share prices need to rise by almost 50 per cent from here. And that could take years, says the head of investment market research at fund manager Perpetual, Matthew Sherwood.

Sherwood cautions investors who, tempted by the easy gains, are considering throwing caution to the wind and going headlong into the sharemarket hoping to quickly recover earlier losses.

He says most of the easy gains on the back of the economic recovery have probably already been made.

"The best thing to do is to invest conservatively and reduce the risk in what is going to continue to be a volatile environment," Sherwood says.

Investing conservatively means selecting good, dividend-paying companies. A portfolio of income-paying shares helps take some of the sting out of the tail of the capital losses, he says. As economic conditions improve, so do dividends.

Fund managers tend to favour companies that pay consistently high dividends because of the fact that it helps smooth out the volatility of share prices for the investors in their funds.

Even when a company's share price is falling, it usually keeps paying dividends to investors. "Since 1882 the Australian sharemarket, on average, has returned about 12 per cent a year and half of that has come from dividends," Sherwood says.

The importance of dividends to Australian investors is not only that more of the total return from Australian shares is made up of dividends than is the case with overseas shares but that the dividends are favourably taxed in the hands of investors through our dividend imputation system.

The point for investors is simple. The best way for investors to get ahead is by having a well-diversified portfolio of consistently performing investments. That is likely to be a much more profitable route for investors in the long-term than holding a portfolio of investments whose returns are highly volatile and do not pay much by way of dividends.

Successful fund managers, such as Perpetual and Investors Mutual, have an investment philosophy that focuses on capital preservation and on investing in income-paying investments with the aim of delivering consistent total returns of regular income and capital growth.

Such an approach means the fund manager is unlikely to appear at the very top of performance league tables in any year but instead will provide the unit holders in their share funds with higher returns in the long run. Individual investors would do well to follow their lead.

The smoother ride provided by a lower-returning, income-paying investment will also help ensure investors stay invested.

Faced with significant losses, investors are more likely to take fright, sell their shares and put their money into cash, which in the long-term is the lowest-returning asset class of all.

Sticking with a portfolio that produces consistent returns has another advantage in that investors do not feel pressured to seek out the next big thing in the hope of making spectacular returns.

Trading not only takes up much more time, "churning" a portfolio also increases both transactions costs and taxes, particularly if the share is held for less than a year.

What you need to make to recover your losses
Cost    Loss    Price   Return
price   (%)     After   required (%)
                loss (%)
$100    5       95      5.3
$100    10      90      11.1
$100    20      80      25
$100    50      50      100
$100    70      30      233
$100    90      10      900
SOURCE: FAIRFAX

http://www.businessday.com.au/news/business/money/planning/sure-and-steady-in-volatile-times/2010/02/02/1264876022132.html

Your must-know guide to landing your first job

Once upon a time, graduates could take their pick of top jobs. But with a degree now considered the minimum qualification by many employers, and most people progressing to higher education, starting a career is more competitive than ever.

According to Cheryl Hill, national manager of business support at Mosaic Recruitment, the first thing graduate job seekers need to do is keep their career options open - your core knowledge and skills are likely to be suited to a range of jobs in today’s rapidly changing workplace.

“Take the time to evaluate your abilities, explore your career possibilities, and find out what you’re truly passionate about,” she says. “Then speak to your university career councillor or a recruitment agent to determine which career path and employers to pursue.”

When it comes to preparing a CV that stands out from the crowd, Hill recommends tailoring it to the job you’re applying for and emphasising your commitment, energy and enthusiasm.

“Details of part-time or casual jobs, extra curricular activities, and club or society memberships are all valuable achievements,” she says. “Don’t sell yourself short just because your professional experience is limited - give employers a well-rounded view of your talents by including all relevant experience to date.”

And for a head start in the CV stakes, try listing your volunteer history. “Committing your personal time to a cause you feel passionate about demonstrates your values, morals, and ethics,” says Hill. “It also shows your willingness to go that extra mile, which is something employers look for.”

These days, all employers want conscientious go-getters - so what you wear and how you present yourself is often as important as your grades. To this end, choose an outfit that’s appropriate for the job you’re interviewing for, and for maximum impact, pay attention to your facial expressions, body language, and tone of voice.

“Research the company you’re applying for, or better still, anticipate the questions you might be asked and practice your answers in mock job interviews with friends,” says Hill. “Also consider your strengths and weaknesses in advance, and prepare a list of questions to ask your prospective employer.”

Finally, don't forget that all job interviews are learning curves. Self-analysis can help you ace the next round and increase your chances of an offer, or if you're turned down after the job interview, constructive feedback can be your best friend.

“Professional rejection should never be taken personally,” says Hill. “After all, everyone's had to apply for their first job at some point.”

Published: 12 September 2007

http://content.mycareer.com.au/advice-research/graduate/your-must-know-guide-to-landing-your-first-job.aspx

The many flaws of Wall Street's latest rally

March 19, 2010

With US stocks pressing up against 17-month highs, the inevitable question arises: "Does this rally have legs?"

From one perspective, things couldn't look rosier for the bulls. The S&P 500 touched another 17-month high on Wednesday, breaking through levels analysts identified as significant resistance. More stocks in the S&P are hitting fresh 52-week highs than at any time during the course of the rally.

But the steady rise in the last six weeks has been accompanied by middling volume and underperformance in key areas, such as semiconductor companies. Market technicians and strategists believe the current run is overbought, suggesting at least a near-term pullback.

"What we are seeing represents a very defensive stance among investors," said Mike O'Rourke, chief market strategist at BTIG, an institutional brokerage firm in New York. "You are seeing investor disinterest in equities and that's why volume is languishing here."

This week's consolidated volume has been telling. With major averages hitting recovery highs, Monday marked the third slowest volume day of 2010 when about 7.24 billion shares traded on the combined New York, American and Nasdaq stock markets, below last year's estimated daily average of 9.65 billion.

The tepid volume suggests a lack of broader conviction, and is a sign momentum is mostly behind the latest run-up rather than any broad-based accumulation of stocks.(comment: an interesting point)

Momentum investing relies on chasing short-term price action on hard-charging stocks and shunning those that appear to be out of favor.

John Kosar, market technician and president of Asbury Research in Chicago, said there was a growing risk the run-up that resumed in February was a "countertrend" rally within a larger decline that began in January.

"Volume measures investor urgency and this recent lack of urgency to buy is characteristic of either peaking markets or countertrend rallies," he said.

Overbought
Investors were abuzz this week as the benchmark S&P 500 took out resistance at the 1150 level. Investors see that as clearing a path to a run to 1200. But other important technical metrics are not garnering the attention of the overall average.

According to Reuters chart data, the S&P 500's 14-day relative strength index (RSI), which measures the magnitude of the gains to determine overbought or oversold conditions, is hitting levels not seen since September 1995 - approaching 91, a threshold that technically signifies an overbought market.

An RSI ranges from zero to 100. When it approaches 70 that traditionally signals an overbought condition in an asset or an index, and the risk of a pullback increases.

Additionally, research firm Bespoke Investment Group pointed out that 89 per cent of S&P 500 stocks are trading above their 50-day moving averages, a level that usually augers for a pullback in the short-term.

Semi-tough
The semiconductor index has failed to confirm coincident 19-month closing highs in the Nasdaq Composite index, a bearish development considering technology's tendency to lead the market's advances and declines.

The S&P 500 is up 10.3 per cent since its recent closing low of February 8, while the small-cap benchmark Russell 2000 has rallied more than 16 per cent over the same period. Year-to-date the S&P 500 is up about 5 per cent, whereas the Russell 2000 is up 9 per cent.

To be sure, the run-up in small-cap stocks shows how risk appetite has risen due to optimism about the US recovery. Small-cap companies are viewed as more nimble and among the first to benefit from an apparent recovery.

But the divergence between strength in the Russell 2000 and the semiconductor index should be taken as a cautionary tale. Divergences occur when key indexes move in the opposite direction of the market's primary trend and tend to catch investors off guard.

Analysts say another ominous development is the sharp decline in overall volatility, suggesting complacency is setting in. The CBOE Volatility index, Wall Street's favorite gauge of investor sentiment, is trading at 22-month lows below the 17 level.

According to Kosar, declines to 18 or lower in the VIX have either coincided with or led every important near-term peak in the S&P 500 since October 2007. He said the market's gains may be limited without a near-term decline to work off extremes in investor complacency. VIX futures suggest a rise in volatility later this year.

"Although the February rally in US equity prices may continue from here on a week-to-week basis, a sustainable advance is unlikely from here without at least one to several months of a corrective decline first," said Kosar.

http://www.businessday.com.au/business/markets/the-many-flaws-of-wall-streets-latest-rally-20100319-qkf3.html

Danger of hedging your bets

John Collett
March 17, 201


The promise of high returns and low risk proved too good to be true.

Hedge funds were sold to small investors as a way to get a slice of the action that had been available only to wealthy individual investors or institutional investors.

But many hedge funds have proved a disappointment. The money in some, such as Astarra, went missing. Others, notably Bernard Madoff's hedge fund in the US, were no more than Ponzi schemes where new money was used to pay existing investors high returns.

Most hedge funds have produced poor returns and many have closed, or are in the process of closing, and are returning money to investors. Some other managers have frozen or restricted redemptions from their funds.

Before their reputations were shredded by the financial crisis, hedge fund managers operating in tax havens in the Caribbean or in the US and Europe were regarded as among the best and brightest of the funds management industry. They rewarded themselves handsomely. The funds tend to have hefty performance fees and, in the good times, hedge fund managers made a fortune for themselves.

They promised the low risk of fixed interest with the high returns of shares. These two things - high returns and low risk - have long been regarded as incompatible in the same investment. They also promised returns that were not correlated to the performance of the sharemarket.

In 2001, just after the launch of several hedge funds aimed at small investors, a leading financial planner, Robert Keavney, said there was "nothing on this planet that is more or less guaranteed to give double-digit returns every year". He said investors had other options available to them in volatile periods, such as fixed interest, property and cash, which are not correlated to the sharemarket.

The hedge fund promoters promised returns of between 10 per cent and 15 per cent a year after management fees, over at least three years, regardless of the direction of share and bond markets. For small investors, hedge funds were bundled up into one offering by the big fund managers. Investing in several hedge funds through "fund of hedge funds" was considered more prudent for small investors because individual hedge fund managers were considered too risky. Hedge funds are mostly small businesses and usually not subject to regulation, though there are moves by governments overseas to bring them into the regulatory net.

The funds of hedge funds invested in up to 30 underlying hedge funds across a variety of impressive-sounding hedge fund strategies. Some of the more popular strategies include "long short", which is where the manager bets the price of some stocks will fall and others will rise, and "macro" strategies, where the manager looks for small pricing differences between markets.

From their launch in the early 2000s until the crisis in 2008, most were producing average annualised returns of 8 per cent or 9 per cent - just below the promised 10 per cent to 15 per cent.

It took the crisis to disprove one of the key claims of the funds of hedge funds: that their returns were mostly not correlated to sharemarkets. When sharemarkets around the world dropped by about 25 per cent in Australian dollar terms during 2008, the returns of most of the funds of hedge funds dropped by about as much.


One factor hampering their performance was the hefty investment management fees. Most hedge funds charge their small investors an annual fee of 1 per cent to 2 per cent of the money invested and a performance fee of 20 per cent of any returns above zero or the cash rate. By comparison, most share funds charge fees of less than 0.5 per cent a year.

The head of research at Morningstar, Tim Murphy, says part of the reason for the poor performances of hedge funds during the crisis was because many were highly leveraged. He says many of the trading strategies produced fairly small returns and they borrowed to magnify these returns. But when credit markets dried up in 2008, many funds had trouble borrowing.

Another problem with hedge funds was illiquidity. Investors wanted their money back and so did lenders to the hedge funds, forcing them to sell their assets at the worst possible time at poor prices with their returns being savaged as a result.

The average annual returns over the past five years of the funds of hedge funds, given in the table, range from minus 12 per cent to 2.27 per cent. Murphy says it is "hard to argue" that small investors have been served well by their investments in hedge funds.

UNDERACHIEVEMENT
* Hedge fund promoters have failed to deliver on their promises.


* Hefty fees leave even less for small investors.


* As a result of the financial crisis, many had to freeze redemptions.


* Others are slowly handing back money.

http://www.businessday.com.au/news/business/money/investment/danger-of-hedging-your-bets/2010/03/16/1268501456367.html?page=fullpage#contentSwap1