Small Cap Value Report (21 Aug 2015) - Indices, SRT, TECH, WSG

21st Aug '15 by Paul Scott

19 comments 21559 reads

Good morning!

US markets - buying the dip?

Things are getting very interesting. I was following the US market last night, and there was a real sense of fear, and unrelenting selling, resulting in the Dow dropping 358 points, the S&P 500 down a similar percentage (-2.1%), and NASDAQ worst, down -2.83%. Those are big drops for such large indices. Necessary correction, or the start of a bear market? No idea, but I want to be prepared for either.

Incidentally, just to point out to a CNBC commentator last night who said he's been a market professional for 35 years, the singular of "indices" is "index", not "indice". I stopped listening to him after that. If people don't get the basics right, are they going to be any good on more complex things?

Apparently 125 of the S&P 500 stocks are now in a bear market (down 20%), according to another commentator, which is a bit scary. Although to my mind, the US market is the most obviously over-valued market, so it needs a correction to bring valuations down to more sensible levels. Also I bet a lot of those are resources stocks.

I'm starting to worry, so am feeling less sanguine about markets overall than I was a few days ago. My main worry is that "buying the dip" is going to fail at some point. We don't know when, but when it does fail, I think the aftermath could be very scary - a market crash basically.

Looking at the 10-year chart above, of the S&P 500 it shows what an amazingly successful strategy buying the dip has been since early 2009. It is now totally ingrained in the mindset of US investors that you buy the dips. However, look how the Index has repeatedly failed to make new highs this year. It's starting to look like the market has made a high it can't break beyond. So my worry is that, with many US stocks now over-valued, some grotesquely so, then the path of least resistance could become downwards. Where the US leads, the UK follows.

Relentless buying of the dips (and ignoring fundamentals) is bound to cause a market crash eventually, as it has driven some US valuations sky-high, and the risk is that everyone will simultaneously try to sell, when key levels are broken. It's similar to the conditions that caused the 1987…

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mrwhits

21st Aug '15

Hi Paul,

Perhaps you should have a chat with Ed about his long/short portfolio, geared 5X!

I fear for him when there is a downturn and what the consequences may be......

I quick google search for "pairs trading volkswagon" brings up some interesting, and at times tragic, stories....

http://www.newtraderu.com/2013/08/06/twelve-of-the-biggest-trading-losses-in-history/

regards

jraitt

Earlier yesterday, Interior Minister Lieutenant General Shaikh Rashid bin Abdulla Al Khalifa signed a deal with UK-based SRT Marine Technology Limited chief executive Simon Tucker to operate the AIS.

The minister said efforts will continue to upgrade and modernise the Coastguard, and other security agencies, by providing them with the latest high-tech equipment to ensure maritime security and enforce the law.

Coastguard Commander Commodore Ala’a Siyadi met representatives from fishermen’s societies and briefed them on the new system. The device will be installed in 7,500 vessels registered with the Coastguard, he said.

The devices will be installed in Bandar Aldar, Muharraq and Budaiya jetty

Sorry missed out - its Bahrain

Sorry to have 3 goes. SRT has come a long way from being a provider of boxes for leisure yachts to providing major tracking schemes for governments. It is world class at what it does and has built a big moat. This has taken time and the timing of government orders is difficult to predict. The Company is very open and has webcasts after all results for investors - the AGM was held in its factory. Look at its website.
I believe that there are many orders to come - see its website - £200million, some nearer than others
If you add today's 5 million to the RNS 24/7/15 order for Phillipines $700,000 and RNS 9/6/15 order for Middle East $290,000 it seems to me that all that work is bearing fruit.

AlanJenkins2

If you're afraid to buy the dips,you could always open hedges on the bulges and scale them down on dips.

Paul Hill

My worry here is that regardless of what the Fed does with interest rates next month, the Asian/Chinese banking system seems to be showing early signs of a credit crunch.

Indeed the Singapore LIBOR rate (S$, or SORA) more than doubled last night from 0.12% to 0.28%! Granted this is nowhere near danger territory yet, but it is nonetheless something to watch . This issue is also manifesting itself in the share prices of standard chartered and HSBC.

https://secure.sgs.gov.sg/fdanet/DailyDomesticInterbankRates.aspx

jimbobjames2002

Hi Paul, fascinating article – a lot of food for thought. I’ve been bearish on the S&P for a while now. Looking at it from a purely quant perspective there’s some very interesting research from K1T Capital, which is explained on this link:

http://www.tiptv.co.uk/archives/stock-roulette/

The basic principle is that when the price is lower than was exactly 6 months ago its time to be bearish and vice versa in a bullish market. Simple premise but from a quant perspective it has historically worked with surprising accuracy – preceding past corrections in the US. In the last week the S&P has dipped below the 6 month levels so in theory its time to be bearish now. Hence I’ve taken out a short on the S&P, which will hopefully hedge my positions somewhat.

I know this is only quantitative, so doesn’t take into account many of the things you mention above but it’s an interesting technical guide if nothing else.

simoan

Indeed the Singapore LIBOR rate (S$, or SORA) more than doubled last night from 0.12% to 0.28%!

Great news for the recent property purchase by Laura Ashley then... NOT!!

I think one's stance on the markets completely depends on your personal circumstances. I can see Paul's perspective as he is a full-time investor that needs to protect his pot (although I'm not sure why given the past record I'd buy SRT today if I was in that boat). However, if like me you are lucky enough to have a highly paid job, working in a thriving industry, living in a low inflation, low interest rate environment and having lots of spare cash every month, I only see long-term opportunity where others see fear. So my perspective is somewhat different.

I know they're not small caps but I've happily been buying someARM and MARS earlier today to tuck away. And have been selectively buying quality, low production cost US listed resource stocks over the past few days (XOM, POT, CCJ). Also still have most of this year's ISA allowance left...

rumplestiltskin

It's interesting that you should point out a grammatical error and then talk about basics. I pointed out to you that "a company is" and not "a company are" as you had been saying, and I got a right grilling for it. Having said that, I am a great fan of your site and read it every day and I am expecting a further grilling any time now. Bye the way, did you take a look at AVCT? (even further grilling imminent!)

Paul Scott

Hi Rumplestiltskin,

I think it's a very different matter when you're speaking live on television, an expert in your field for 35 years, and you call an Index by the wrong word, by calling it an Indice!

That's totally different from your point about companies being a legal entity, therefore you want me to write as if a company has an opinion. That doesn't make sense to me, as a company in practice is a collection of people, which is why I have taken on board your point, but rejected it, because when I meet company management, I am meeting people, who have opinions & who make decisions. Therefore when writing about that, I'm viewing the company as that collection of people, hence "they", not "it".

So it's something I have indeed thought about, and decided that my method of expression makes more sense in human terms, if not in strictly legal terms such as you set out.

Actually, partly for devilment, and to amuse you, I do occasionally refer to a company as "it" - I hope you've spotted those! ;-)

I also write quite conversationally, so will sometimes ignore rules such as that you should not start a sentence with the word "But...". I'm aware of that rule, but choose to ignore it sometimes.

Perfect grammar & spelling are nice, but it's more important to get the meaning across well. So maybe I should have been kinder to the CNBC expert? I knew what he meant after all. Although I do think using the correct basic definitions in an area of special expertise, is surely not too much to ask? Maybe it's an American thing, as they have been cheerfully mangling the English language for many decades! (as have increasing numbers of Britons, I might add, who I am finding increasingly difficult to understand in day to day conversation. Schools don't seem to teach kids how to speak properly any more).

There, I hope that wasn't a grilling, maybe just rare, rather than well done ;-)

Regards, Paul.

MichaelFBS

As always a really interesting post Paul. I am in the position of just having transferred a Zurich pension to my newly opened SIPP. Because one has to sell the units in the Zurich pension as one can only transfer cash not the investment funds to the SIPP I am now 40% in cash. If what you say is right Paul this makes me feel very comfortable. One stock I do intend to keep buying is Distil (LON:DIS) Disney, which long term still looks good to me. Otherwise I will sit quietly and wait to see what happens.

Whether I prune any of my existing holdings I am not sure. I will take a good look when I get back from holiday!

Bezhe

"If people don't get the basics right, are they going to be any good on more complex things?"

Another pearl of wisdom from Paul. I wonder if anyone pointed out the error to the CNBC guy or is it just people on this side of the Atlantic that understand these things?

Thanks for that Paul. Well done for a great site and I'm pretty sure that soon the Oxford Dictionary's word for "to have one's mind at work" will be "Fink."
ATB, M.

I know there's a sea of red today, but Epwin being down 8.24% seems overdone to me. Hope its not due to insider information like ENTU recently was.

Splode

Paul - I believe "who" in the the third-to-last line of Comment #10 should be "whom", although I do appreciate this word is very nearly extinct.

Please do not reply to this impertinent, irrelevant, whimsical remark!

Cisk

Gentleman, the grammatical discussion is a most welcome distraction on days when I just see a sea of red in my portfolio.

Paul, keep up the great work. I'll be off to a pub / bar in the Strand as quick as my legs will carry me as soon as I leave work. Too warm and sunny to be panicking over stocks.

22nd Aug '15

Yes, yes, I know. Smart-arse!

P.

Mechanical Bull

I have started following the FTSE Actuary Share Indices P/E ratios on the FT Data Archive (Look under "World Markets at a Glance"). There is an absolute treasure trove of data here, some of which I can't find anywhere else. It is only available in pdf and is a bit of a pig to work with, but it is very useful for getting insight into overall market conditions. Anyway, here are the P/E ratios for the FTSE 100 and 250 indices since the beginning of 2010:

This suggests that despite recent falls, the FTSE 100 is about 20 per cent more expensive than the average valuation over the last five years. In contrast the FTSE 250 is at about average value compared with the past 5 years and is somewhat cheaper than 2 years ago. In any case, market sentiment is driven mainly by large caps and so I think that this bear market may have some way to go. A further 15-20 per cent drop from here, or even more, would not surprise me.

I don’t think this is like the pullback we had last October. That didn’t seem to be triggered by anything in particular. This time, things are clearly being driven by deteriorating global sentiment.

During this year, up until last week, I was mainly just running my profits from investments made over the previous couple years. That changed on Wednesday of last week. There was quite a steep one day drop and that combined with what seemed like toppy large cap valuations convinced me to start liquidating some of my portfolio. I am now at 33 per cent cash (up from 20 per cent two weeks ago).

Given what happened on Friday, I am going to sell some more stocks aiming to get to about 40 per cent. No part of the market can be described as cheap so it is going to be a case of waiting until good valuations start appearing again. StockRanks very much underpin my investing methodology, but from what I have been able to deduce, the premium effect seems to dissipate during bear markets. For this reason, at the moment, cash is king.

DJLJ23

23rd Aug '15

Hi Paul,
You asked why invest in Westminster, and from straight forward numbers perspective it appears crazy, in deed i'm not not terribly impressed by the management.
How ever if Europe is ever going to slow down the flow of migrants & refugees then investment in these countries economies is fundamental (Peace would also help) and Westminister group could be a serious beneficiary. Why because their business model appears to be directly linked to growth in passenger numbers, which inturn is linked to a thriving economy. So basically with falling oil prices, china slipping, they are pretty well done for in the short term.
I have no holding, but watch with interest.

Small Cap Value Report (21 Aug 2015) - Indices, SRT, TECH, WSG

US markets - buying the dip?

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Paul Scott

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