Summer stock market duldrums

It's no coincidence that the market suffers quite a bit in the summer.  Especially this summer with a little event going on in Brazil.

I've recently come from a talk that put some logic behind market actions as a consequence of the World Cup.  What is the other big item that goes hand in hand with World Cup?  Lots of beer?  loots of food?  Yes, but the biggest would have to be a bit illegal and probably trumps the amount of money spent on both items.  

You probably guessed it, gambling!  Yes, the World Cup brings tons of gambling.  You don't have to be a mathematician to guess how much money is spent.  Just ask your friends and family whether or not they lost or won money on the World Cup.  You will have an idea of how much money goes through.  

It's not pretty, but generally the market will tend to decline after the World Cup due to these gambling debts.  People will be forced to sell their stocks and homes to meet obligations lost by betting during World Cup.   Of course everything has to be taken with a grain of salt. Do you agree or disagree.  let me know!

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The TSI indicator

In Technical Analysis, one of my favorite indicators in an oscillator called a true strength indicator or the TSI for short.

One of the most taught subjects in Technical Analysis is something called oscillator divergence, where price makes a lower low in a down moving market and the price oscillator doesn't make a corresponding new low.  Price oscillators are many in TA, example, RSI, stochastics, etc.

Oscillator divergence is simple enough to understand, but the tricky part is looking at what oscillator works well.  90 percent of oscillators are based solely on price and also suffer from lag.  At crucial times, these oscillators fail to record the divergences an astonishing amount of times.  

The TSI is one of the few indicators based on a derivative of a moving average of prices and differs from traditional oscillators in its speed and accuracy of tracking price momentum.  You would be amazed at how accurate and how many divergences it captures compared to traditional momentum oscillators.  Take a look at it and give it a go!

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Adding a little gula in your kopi never hurts

Ever notice that your favorite candy bar is going up in price?  Maybe a little extra 30 sen charge for drinks and your local kopi tiam?  I know, I am quite angry we are getting little benefit for our hard earned money and seeing it deteriorate due to inflation.

Inflation hurts, but as an investor, we have to see the forest for the trees, which leads me to an investment opportunity, MSM holdings.  I do own this stock so just be aware that you should always do your own research and come to your own conclusions.

MSM holdings makes the above bag of sugar that is so cheap at the local markets.  Sugar is a price controlled item and lately, the price controls have been gradually removed.  What will a price increase do for MSM holdings?  The revenue will skyrocket and so will the earnings, and followed by the stock price.

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Dividends and Beta, putting it together

A lot of people pooh pooh dividends.  But I'm going to stick up for companies which pay it out regularly.  The purest form of return on investment is dividends because this the the hard money which investors see.  Take for example a well known tech company, Apple.  As profitable as they are.  Very few investors have seen money coming in the form of dividends.  

The idea of shareholder return is more important than ever as Apple has gone off its highs.  those people who bought shares near the top are wondering. Where is my return? The company has billions of dollars!  But their poor dividend policy won't be winning over those investors who bought near the high!

The major rule is, if the stock has a high beta and DOESN'T pay out much dividends.  Sell these stocks first in times when defence is of the utmost importance.  The rationale is simple.  You aren't getting much return to hold these stocks and if the market turns, the likelihood of a high beta stock turning lower at the same time is higher than normal.  

Number 1 rule:

To play defense, sell those stocks with high beta which DOESN'T have much of a dividend return.   

You could go through your portfolio and rank each holding in terms of beta and dividend return.  Just have those which are low on dividend return, and high on beta on your potential sell list.

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What kind of investor are you?

Risk adverse vs. risk seeking.  We'v heard this statement from many investment advisors.  If you are young, you should generally be risk-seeking and go for more volatile investments.  If you are older, you should go for more risk-adverse investments.

Human nature says we are most risk adverse after suffering psychological damage from losses whether they are young or old.  The market tests the limits of psychological tolerance of price movement, how much it can withstand.

The best thing you could do for yourself is to objectively evaluate what kind of investor you are and stay within the realms of your limitations.  If you are a person who can tolerate losses, for example basically take the stock and store it in a container and look at the price once a month or quarter.  You are mostly able to tolerate the losses and could therefore be a bit more of a risk seeker especially on those investments you are absolutely sure will do well.

If you are a person who needs to have confirmation of a positive gain in your portfolio almost everyday, you are actually more risk-adverse and more prone to emotional ups and downs of the market.

Dividend stocks are more for you as the dividends will keep your spirit high.  Maybe you won't be a billionaire, but honesty with your own personality is another road to great wealth albeit slow and steady.  The most difficult part of investing is staying within your means as an investor.

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Much ado about dividends

Now we have our Betas down pat.

Lets summarize:

1. High beta stocks' movement are exaggerated by the market index, in the same direction.
2. Low beta stocks' movement are not as affected by the market index, gains are not as strong, as well as losses.
3. A beta of 1 means the stock moves pretty much in tune with the market.  example:  if BAT has a beta of 1, if the market is up one percent, BAT will likely be up one percent as well.

We'll move on to the subject of dividends.  Betas are nice and all, but is too little information on its own to make an investment decision.  High dividends are what makes high beta stocks' movements bearable.

Earnings are key of course, but earnings don't do much when the market is falling and you have nothing to show for it with little cash return or record of whether the board of the company will return money to the investor.  After all, we all invest to get money back from the investment.  Nothing is more pure of a return than in the form of dividends.

If a stock pays high dividends, holding the stock is definitely bearable and keeps the investor in high spirits by not having to realize the loss.

So, if you are an investor who would rather buy and hold than realize a loss, dividend stocks are best suited for this task.  Digest this information, I'll talk more about a tactically strong investment plan with dividends and betas next post.

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