Investing with Vertigo!

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In my previous contribution, I wrote that the S&P500 index has been trending upward since 2009. And yet, even in this positive course, many investors are anxious and prefer cash or short positions.

We have covered one of the principles on which technical analysis is built. 
In this contribution, you will learn which shares are still interesting, because the vertigo may not have decreased since my last contributions. Stock market indexes are quoted at a percent higher once again.

Which sectors and companies still have a lot of potential?

How about the American company Amazon? The company appears on the news regularly. In seven years, the price rose from 100 to 1000 dollars!

Are you the proud owner of this share, then making a decision is much easier for you than for an investor who still has to buy. Investors with vertigo opt for different companies. 

In alphabetical order, I will name a few potential sectors:

  • Ageing
  • Artificial Intelligence
  • Batteries
  • Big Data
  • Drones
  • Medical Cannabis
  • Security

How many companies are in each of these sectors? And how many of those companies succeed in their business model? Investing in a future sector can pay off, but also comes with more risk. In other words, it is interesting for a small part of your capital.

A safer alternative

In previous years, I always preferred the American market, because the S&P500 continued to break through its highest top. Over the same period, EuroStoxx 600 (closing price at 385 points) still has to break through its important resistance level of 410 points. These are the old tops of 2000, 2007 and 2015 (the black line on Graph 1 is the Eurostoxx 600).
Are there sectors in Europe that stay behind? Are there sectors that show a sign of strength on the short term? In that case, it is profitable to buy shares without the feeling of vertigo.

Weakest sectors within Europe
  • The Stoxx 600 Banks: during the book in 2007, this sector was stronger than the Stoxx600. 
  • The Stoxx 600 Media: the top of 2015 was higher than the top of 2007.
  • The Stoxx 600 Telecommunication: the interim tops were not broken through. This is the biggest loser.

Sectors above are 40% to 60% lower than in October 1999. They are far below EuroStoxx 600 main index and, as such, have upward potential. You can clearly see this in Graph 1, the long-term graph since 1999.

Before getting onto the market, keep the following basic conditions in mind:

  • The sector performs strongly on the short term
  • Buy the share close to its support of right after a breakthrough
  • Sell a share if the trend turns

Consider the aforementioned conditions and you will avoid long-term weak positions in your portfolio.

What does sector strength mean on the short term?

In order to measure the strength, compare the sector with the main index. Check

  • the most recent bottoms and most recent tops
  • the most recent movement

In Graph 2, you can find the Stoxx Europe 600 (black line is the main index) with the same three sectors on the short term. I will describe what I see.

1. Telecommunication: Decreases alongside the main index and has difficulties bouncing back up. The graph came near the main index and is now 6% weaker.

2. Media: Decreased during the previous three months and reached another new bottom. The current level quotes underneath the bottom of August 2017. That bottom is a new resistance for shares in that sector. 

3. Banks: The most anxious of the three. It rose above the main index and created a second top while the main index decreased. That is strong. It went downward after all and now follows the increase of the previous week.

Both the main index and the bank sector quote closely to the top of three months ago. That is why the bank sector has my preference for the weaker sectors. If the sector breaks through its top of three months ago, it is a positive sign. 

Take into account that a few bank shares are performing beautifully. KBC, Banco Bpm and Credit Agricole are strong. The fact that the banking sector shows signs of strength only now signals that a second group from that sector is preparing to crawl out of the bottom. Deutsche Bank is a nice example. 

Using the methods described above you can follow up on sectors that are left behind to buy ‘cheap’ shares at the right moment. Of course, on the condition that market indexes rise further. 

From this article, we will take away three elements from technical analysis that can help us invest successfully in the future: 
  • If you do not wish to buy strong shares due to vertigo, avoid buying weak shares in strong sectors;
  • Search for sectors left behind that show a sign of strength; 
  • Buy shares from the weak sector that cause the sector to bounce up.
Paul Gins
About the author

The trend is your friend

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