A recent survey by JPMorgan Chase found that the current bond market positions taken by the majority of its clients imply that prices would fall and yields would rise. Sterling’s depreciation in the wake of the interest rate rise shows that standard market reactions can’t be taken for granted, but as we pointed out last week (‘Trump, taxes & tech’), equity markets are ripe for a correction – and a major one at that – particularly if recent policy initiatives by the US Federal Reserve and the ECB prove a major draw on liquidity. Readers needn’t fret; the best time to buy stocks is when everyone else is running for cover.
A friend of mine, an upholsterer by trade, had never bought a share in his life until he was forced to retire in the early part of the new millennium. By his own admission, his foray into the market was little more than a diversion, as he weighed up the investment options for a newly realised superannuation lump sum. However, any initial reluctance soon gave way to a rapidly mounting capital allocation which – as far as we’ve been able to work it out – has delivered a total return in excess of 8 per cent annually since 2004.
What’s more, this has been a relatively low-risk affair. My friend, who lives in New South Wales, Australia, has built his portfolio around a core of ASX 50 shares, including blue-chips such as Wesfarmers (ASX:WES) and Telstra (ASX:TLS), on contrarian principles that would have been familiar to the likes of John Templeton and perhaps even Nathan Rothschild. Put simply: he moved into the market as soon as it became clear that most other active participants had moved out. For readers of the IC, this approach would hardly seem novel, but the point is it has proved a profitable strategy for anyone who intuitively recognises how markets function – and that’s why it works; it plugs into the underlying ‘group dynamic’.
The returns that my friend has achieved are all the more remarkable given that Australia’s All-Ordinaries benchmark has remained under water since the onset of the global financial crisis, delivering a modest 2.9 per cent annually on a total return basis. And this is someone who, initially at least, spent most of his time staring at share price charts in a crude ‘bottom-fishing’ exercise, augmented by occasional recourse to scuttlebutt. Given that the bulk of his long-term portfolio was acquired at the beginning of 2004 and five years later in 2009, the timing seems inspired, but his pursuit of a contrarian strategy became far more straightforward once he secured access to volume data.
We always maintain that ‘calling the market’ is a fool’s errand, but that doesn’t mean you can’t tell which way the wind is blowing. Assuming there is sufficient liquidity, it doesn’t matter whether you’re buying and selling equities, cottonseed or cuckoo clocks, it is possible to gauge market sentiment (‘momentum’ is probably a more apt description) simply by looking at price/volume trends. The critical question relates to the time periods you choose to employ. For the uninitiated, here are a few examples of how the dynamic can provide a pointer to where markets are headed (though not where they’ll settle or plateau).
•A price increase with steadily increasing volume points to continued upward momentum.
•Static pricing accompanied by large volume increases points to resistance, implying a large seller is in the market.
•If the number of trades is high and the prices are coming down, this warrants caution. You are probably looking at investors backing out from that stock.
