Much more than a simple moving average

Thursday, 14 September 2017
Melbourne, Australia
By Bernd Struben

  • How to put time on your side
  • A letter from Phil

Over the past few weeks in Port Phillip Insider, ‘time’ has come up, well, time and again.

There’s a reason for that.

Buy and hold investors tend to ignore time entirely. They focus more on a company’s fundamentals. Does it have good management? How did the latest earnings report stack up? What’s the growth outlook? And so forth.

Digging into a company’s fundamental strength is an important step before deciding to invest in its stock. But even if you’re looking to hold on to a stock for 20 years or more, your long-term returns can vary hugely depending on when you decide to invest.

Now, I’m not talking about picking the absolute bottom. That’s a mug’s game.

I’m talking about using time to greatly increase your odds of getting into stocks likely to head higher.

And importantly, I’m also talking about using time to avoid investing long (buying stocks) when the broader market looks set for a correction. Note that I say correction, not crash.

Stock market crashes are far and few between. You probably remember the last one all too well. In Australia, it began in December 2007. By February 2009 the ASX 200 had lost half its value.

The next stock market crash could be many years away. In fact, Time Trader’s Phil Anderson is convinced it won’t happen until 2026.

But corrections — where the market and most stocks lose 10–15% of their value in quick order — happen much more regularly. These are the times you’d obviously want to avoid buying. Or perhaps even short the most vulnerable stocks.

And this is precisely where Phil Anderson’s unrivalled knowledge of time can make all the difference. (You can find out how here.)

More, after the markets.

Markets

Overnight, the Dow Jones Industrial Average gained 39.32 points, or 0.18%.

The S&P 500 added 1.89 points, or 0.08%.

In Europe, the Euro Stoxx 50 index finished up 10.58 points, or 0.30%. Meanwhile, the FTSE 100 lost 0.28%, and Germany’s DAX index rose 0.23%.

In Asian markets, Japan’s Nikkei 225 index is down 41.8 points, or 0.21%. China’s CSI 300 is down 0.21%.

In Australia, the S&P/ASX 200 is down 7.45 points, or 0.13%.

On the commodities markets, West Texas Intermediate crude oil is US$49.24 per barrel. Brent crude is US$55.06 per barrel.

Gold is trading for US$1,320.29 (AU$1,647.07) per troy ounce. Silver is US$17.73 (AU$22.12) per troy ounce.

One bitcoin is worth US$3,915.59.

The Aussie dollar is worth 80.16 US cents.

How to put time on your side

We mentioned long-term investors’ general unfamiliarity with using time in their investment decisions above.

Traders also commonly focus on a stock’s share price. They may then compare the price-to-earnings (PE) ratio to similar stocks to help judge if it’s a good buy.

If they’re using charts, the price is the Y, or vertical axis. Time runs horizontally along the X axis. But even the most experienced traders only pay lip service to time. Meaning they won’t do much more than study the simple moving averages.

Some also use exponential moving averages, which give more weight to recent price moves. But it boils down to the same thing.

As a quick review, a moving average tracks a stock’s share price movements over a certain period of time. Traders look at both the short- and long-term moving averages. What you choose to label ‘short’ and ‘long’ term can vary from a few days for short, to 100 or more days for long.

I grabbed the example below from Investopedia. This chart shows a 15-day short-term moving average (blue line) and a 50-day long-term moving average (red line).



chart image

Source: Investopedia
Click to enlarge


The important thing to note is where the short-term moving average crosses above the long-term moving average (helpfully marked ‘crossover’). This is a bullish signal. If a company’s basic fundamentals look good, that’s generally enough to get traders into the stock.

On the flipside, when the long-term moving average crosses above the short-term average, this is a signal to sell.

Now, there’s nothing wrong with studying moving averages. In fact, along with fundamental analysis, it’s one of many tools Phil and his team at Time Trader employ to narrow down their own stock selection.

Yet even the most thorough fundamental analysis coupled with charting and technical analysis misses the bigger picture.

Earlier I mentioned that the last market crash on the ASX ground to an end in February 2009. Yet corrections, as you can see below, happen much more frequently.



chart image

Source: Yahoo Finance
Click to enlarge


From 31 December 2015 to 12 February 2016, the ASX 200 fell 10.1%. That doesn’t mean all 200 companies in the index fell that much.

Obviously, some suffered less, and some even went up. But many fell even harder.

The point is: If you knew a correction similar to this one was likely, what would you do? I’m guessing you’d either sit on the sidelines for a few weeks. Or only make the most compelling of trades.

And this is exactly where Phil’s intimate knowledge of more than two centuries of market history can make all the difference.

When it comes to studying time and cyclical market movements, no one in the world (to the best of my knowledge) comes even close to this man.

As Phil himself writes, ‘It’s hard to believe, I know.  But the beauty of all this is that I can prove it to you with my T.I.M.E.D based approach to the stock market.

You can check it all out for yourself here.

A letter from Phil

Every now and again I remind you of our dedicated email address, letters@portphillipinsider.com.au. We’re always happy to hear your thoughts on what we’ve been writing about. Or what you’d like us to write about. And if we publish your mail, we promise to only use your first name.

The inbox was fairly empty this morning — except for some mails from readers who mistake it for our customer service email. It’s not!

But I did, amusingly, get an email from Phil Anderson. (It’s OK. He’s fine with me using his last name!)

Hey Bernd,

I caught your piece in the August 31 Port Phillip Insider. That’s an amazing connection you have with Lufkin, Texas and the legendary trader WD Gann.

Fancy that, your family connections go back to Texas and in particular, Lufkin, where Gann was born [on June 6, 1878].

Gann really did see something that nobody else saw. Despite the fact that everybody before him — and most people since him — still look at charts every day and don’t see it. The X-axis that is: the axis that contains “time”.

Legend has it that Gann got his first job selling newspapers on the trains. Now, of course, we need to keep in mind the trains were pretty new back in those days. It probably would have been a pretty interesting job.

And he would’ve met a lot of different types of people and done a lot of travelling, considering how difficult that would’ve been at the time. Especially for a young boy from Lufkin, Texas.

Legend also has it that he met somebody on the train that apparently took a liking to the boy and explained to him a bit about what he understood to be “markets”.

This then sparked Gann’s lifelong interest about how “time” worked.

I can tell you, Bernd, what Gann (re)discovered defies belief, really. That time moves in set time frames. Even better, that you can forecast this in advance.

And better yet, you can prove that all by using the stock market. Because the stock market has highs and lows and changes of trend that occur at a time that can be clearly recorded — exactly. To the minute. To the second even.

It’s been a lifelong study for me as well. A study that continues to this day.’

There are two things that I really like about Time Trader. (Well, there are more, but these two stand out.)

One is the depth of knowledge behind every single stock recommendation the team makes.

The second is their willingness to share that information. The knowledge contained in the special reports available to subscribers alone could change the way you trade forever.

As you’re likely aware, the door for new membership to Time Trader closes tomorrow at midnight. You have until then to discover how to use time to the best of your advantage in every trade you ever make again.

Just go here.

Cheers,
Bernd