Fear & Greed

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Fear & Greed Introducing the Bull/Bear Ratio Mark Weetman Vunani Private Clients

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"Financial intelligence is 90% emotional IQ and 10% Technical IQ. What determines what we do and who we are, is how we as individuals respond to our emotions". Robert Kyiosaki Whether we’re talking about economic confidence or investor optimism, emotions drive the marketplace!

Transcript of Fear & Greed

Page 1: Fear & Greed

Fear & Greed Introducing the Bull/Bear Ratio

Mark Weetman Vunani Private Clients

Page 2: Fear & Greed

Introduction

"Financial intelligence is 90% emotional IQ and 10% Technical IQ.

What determines what we do and who we are, is how we as individuals respond to

our emotions".

Robert Kyiosaki

Whether we’re talking about economic confidence or investor optimism, emotions

drive the marketplace!

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Understanding risk?

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Prior to 19th century

The Roman denarius was debased over time.

The 1340 default of England, due to setbacks in its war with France (the Hundred Years' War; see details).

Seven defaults by Spain, four under Philip II, three under his successors.

1637: Tulip mania in the Netherlands

1720: Bursting of South Sea Bubble (Great Britain) and Mississippi Bubble (France)

19th century

Danish state bankruptcy of 1813

Panic of 1819 – pervasive USA economic recession w/ bank failures; culmination of U.S.'s 1st boom-to-bust economic cycle

Panic of 1825 – pervasive British economic recession in which many British banks failed, & Bank of England nearly failed

Panic of 1837 – pervasive USA economic recession w/ bank failures; a 5 yr depression ensued

Panic of 1847 – a collapse of British financial markets associated with the end of the 1840s railroad boom.

Panic of 1857 – pervasive USA economic recession w/ bank failures

Panic of 1866 – the Overend Gurney crisis (primarily British)

Panic of 1873 – pervasive USA economic recession w/ bank failures, known then as the 5 yr Great Depression & now as the Long Depression

Panic of 1893 – a panic in the United States marked by the collapse of railroad overbuilding and shaky railroad financing which set off a series of bank failures

Australian banking crisis of 1893

Panic of 1896 – an acute economic depression in the United States precipitated by a drop in silver reserves and market concerns on the effects it would have on the gold standard

20th century

Panic of 1901 – limited to crashing of the New York Stock Exchange

Panic of 1907 – pervasive USA economic recession w/ bank failures

Panic of 1910–1911

1910 – Shanghai rubber stock market crisis

Wall Street Crash of 1929, followed by the Great Depression – the largest and most important economic depression in the 20th century

1973 – 1973 oil crisis – oil prices soared, causing the 1973–1974 stock market crash

Secondary banking crisis of 1973–1975 – United Kingdom

1980s – Latin American debt crisis – beginning in Mexico in 1982 with the Mexican Weekend

Bank stock crisis (Israel 1983)

1987 – Black Monday (1987) – the largest one-day percentage decline in stock market history

1989–91 – United States Savings & Loan crisis

1990 – Japanese asset price bubble collapsed

early 1990s – Scandinavian banking crisis: Swedish banking crisis, Finnish banking crisis of 1990s

1992–93 – Black Wednesday – speculative attacks on currencies in the European Exchange Rate Mechanism

1994–95 – 1994 economic crisis in Mexico – speculative attack and default on Mexican debt

1997–98 – 1997 Asian Financial Crisis – devaluations and banking crises across Asia

1998 Russian financial crisis

21st century

2000–2001 – Turkish Crises

2000 – late 2000s Recession

2001 – Argentine Crises

2001 – Bursting of dot-com bubble – speculations concerning internet companies crashed

2008-2009 - Icelandic financial crisis

2007–12 – Financial crisis of 2007–2012, including the 2010 European sovereign debt crisis

Prior to 19th century

The Roman denarius was debased over time.

The 1340 default of England, due to setbacks in its war with France (the Hundred Years' War;).

Seven defaults by Spain, four under Philip II, three under his successors.

1637: Tulip mania in the Netherlands

1720: Bursting of South Sea Bubble (Great Britain) and Mississippi Bubble (France)

19th century

Danish state bankruptcy of 1813

Panic of 1819 – pervasive USA economic recession w/ bank failures; culmination of U.S.'s 1st boom-to-bust economic cycle

Panic of 1825 – pervasive British economic recession in which many British banks failed, & Bank of England nearly failed

Panic of 1837 – pervasive USA economic recession w/ bank failures; a 5 yr depression ensued

Panic of 1847 – a collapse of British financial markets associated with the end of the 1840s railroad boom.

Panic of 1857 – pervasive USA economic recession w/ bank failures

Panic of 1866 – the Overend Gurney crisis (primarily British)

Panic of 1873 – pervasive USA economic recession w/ bank failures, known as the 5 yr Great Depression or the Long Depression

Panic of 1893 – a panic in the United States marked by the collapse of railroad overbuilding and shaky railroad financing which set off a series of bank failures

Australian banking crisis of 1893

Panic of 1896 – an acute economic depression in the United States precipitated by a drop in silver reserves

20th century

Panic of 1901 – limited to crashing of the New York Stock Exchange

Panic of 1907 – pervasive USA economic recession w/ bank failures

1910 – Shanghai rubber stock market crisis

Wall Street Crash of 1929, followed by the Great Depression – the largest and most important economic depression in the 20th century

1973 – 1973 oil crisis – oil prices soared, causing the 1973–1974 stock market crash

Secondary banking crisis of 1973–1975 – United Kingdom

1980s – Latin American debt crisis – beginning in Mexico in 1982 with the Mexican Weekend

Bank stock crisis (Israel 1983)

1987 – Black Monday (1987) – the largest one-day percentage decline in stock market history

1989–91 – United States Savings & Loan crisis

1990 – Japanese asset price bubble collapsed

early 1990s – Scandinavian banking crisis: Swedish banking crisis, Finnish banking crisis of 1990s

1992–93 – Black Wednesday – speculative attacks on currencies in the European Exchange Rate Mechanism

1994–95 – 1994 economic crisis in Mexico – speculative attack and default on Mexican debt

1997–98 – 1997 Asian Financial Crisis – devaluations and banking crises across Asia

1998 Russian financial crisis

21st century

2000–2001 – Turkish Crises

2000 – late 2000s Recession

2001 – Argentine Crises

2001 – Bursting of dot-com bubble – speculations concerning internet companies crashed

2008-2009 - Icelandic financial crisis

2007–12 – Financial crisis of 2007–2012, including the 2010 European sovereign debt crisis

When the bubble bursts!

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“… On Oct. 19, 1987, the Dow plunged almost 23%, its largest one-day percentage-point drop ever. Lessons learnt, and warnings: Stay objective. You’re never going to be right all the time and things can go wrong, so you have to have the confidence that your investment portfolio can stay intact to sustain yourself through illogical times. Buy on fear. One of the big things you realize is that if you just stick with the long-term portfolio you’ll be okay, after 1987, large-cap stock prices rose about 12% in 1988, and about 27% in 1989. Make a shopping list. Don’t wait until the market tanks to decide what you want. There’s no such thing as ‘can't happen.’ The 1987 crash was a 25-sigma event, or 25 standard deviations away from the mean. In other words, a virtually impossible occurrence. Tune out the daily noise. Corrections of 10% are common and typically happen about three times a year. You’ve got to stay focused on the long-term and not get wigged out by the short-term noise. Don’t bail. After Black Monday, an army of economists warned that the financial world was coming to an end. Investors who believed them missed out.” Adapted from 10 Lessons from the Market Crash of 1987 by Wallace Witkowski

Selective Lessons from the Market Crash 0f 1987 Streetdogs, Businessday 25th October 2012

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• professional stock traders actually outperform diagnosed psychopaths when it comes to competitive and risk-taking behaviour.

• traders showed a higher degree of competitiveness than the psychopaths • willing to cause harm to their competitors if they thought it would bring them an advantage • In 2005, a study found that traders who are unable to fully feel their emotions due to brain damage end up

performing better on the market -- possibly because they experience less anxiety about risky trades. • Another research project that concluded in 1996 found that some percentage of both stockbrokers and

politicians display many traits characteristic of psychopathic personality, including a willingness to take risks and an interest in wielding power

• In 2001, a study found that many young Wall Street stockbrokers got little sleep, often reported for work even when suffering from the flu or a virus, and were much more likely to experience symptoms of depression than average Americans.

• In fact, the study found a 23% rate of major depression within the group of young male stockbrokers

Is he really my Buddy!

“Stockbrokers more competitive, Willing to take more risks than psychopaths" University of St. Gallen, Switzerland

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Trading cycle

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Why are you here?

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Bull/Bear ratio

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Pivot points

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Maureen’s Traffic lights

A GREEN Signal with a STAR (*) is a Buy Signal above the 21 day Moving Average and therefore a stronger Signal than a Green Signal

below the 21 Day Moving Average.

A RED Signal with a STAR (*) is a Sell Short Signal below the 21 Day Moving Average and therefore a stronger signal than a Red Signal

above the 21 Day Moving Average

Mixed (Neutral)

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Share Traffic Control

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Volatility

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Put/Call Ratio

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Trading Pitfalls!

Asset management who participated in the survey

• Coronation Fund Managers

• Investec Asset Management

• Old Mutual Investment Group (Macro Strategy Investments)

• Momentum Asset Management

• Sanlam Investment Management

• Stanlib Asset Management

• Element Investment Managers

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Trading Pitfalls!

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Trading Pitfalls!

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Equities high/low road

Rolling twelve months equity performance

Base case Spot Rolling twelve months ending: Rolling 2 yr

28-Sep-12 28-Sep-13 29-Sep-14 average/year

FTSE/JSE Alsi Index 35758 39379 46654

Exit PER (X) 13.70 13.6 13.9

EPS 2610.83 2888.9 3358.9

EPS growth (%) 6.88 10.7 16.3

Growth in FTSE/JSE Alsi index (%) 10.1 18.5 14.30

Bull case Rolling twelve months ending:

28-Sep-12 28-Sep-13 29-Sep-14

FTSE/JSE Alsi Index 35757.98 46110 54480

Exit PER (X) 13.70 16.0 16.2

EPS 2610.83 2888.9 3358.9

EPS growth (%) 10.7 16.3

Growth in FTSE/JSE Alsi index (%) 28.9 18.2 23.55

Bear case Rolling twelve months ending:

28-Sep-12 28-Sep-13 29-Sep-14

FTSE/JSE Alsi Index 35757.98 32648 38828

Exit PER (X) 13.70 11.3 11.6

EPS 2610.83 2888.9 3358.9

EPS growth (%) 10.7 16.3

Growth in FTSE/JSE Alsi index (%) -8.7 18.9 5.12

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Main sectors OIL & GAS Spot Rolling twelve months ending: Rolling 2 yr

28-Sep-12 28-Sep-13 29-Sep-14 average/year

Index 28173 30319 36669

Exit PER (X) 8.81 9.0 10.6

EPS 3199.51 3368.8 3459.4

EPS growth (%) 46.74 5.3 2.7

Growth in Oil & Gas index (%) 7.6 20.9 14.28

MINING Spot Rolling twelve months ending: Rolling 2 yr

28-Sep-12 28-Sep-13 29-Sep-14 average/year

Index 30687 32662 40889

Exit PER (X) 10.54 11.0 12.0

EPS 2910.92 2969.3 3407.4

EPS growth (%) -12.42 2.0 14.8

Growth in Mining index (%) 6.4 25.2 15.81

FINANCIALS Spot Rolling twelve months ending: Rolling 2 yr

28-Sep-12 28-Sep-13 29-Sep-14 average/year

Index 27016 32294 38374

Exit PER (X) 12.53 12.8 13.0

EPS 2156.38 2523.0 2951.9

EPS growth (%) 17.60 17.0 17.0

Growth in Financial index (%) 19.5 18.8 19.18

INDUSTRIALS Spot Rolling twelve months ending: Rolling 2 yr

28-Sep-12 28-Sep-13 29-Sep-14 average/year

Index 41916 45343 51976

Exit PER (X) 18.28 17.5 17.0

EPS 2292.96 2591.0 3057.4

EPS growth (%) 18.43 13.0 18.0

Growth in Industrials index (%) 8.2 14.6 11.40

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Expected asset class performance

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Recommended Portfolio Distribution

Benchmark

(%)

Recomm.

Weight (%)

Relative to

Benchmark Multiple

Relative to

Benchmark Multiple

This Month This Month This Month This Month Last Month Last Month

SA 77.5 75.4 -2.1 0.97 -2.6 0.97

Cash 12.5 6.7 -5.8 0.54 -6.5 0.48 0 g

Bonds 10.0 9.0 -1.0 0.90 -0.5 0.95 -1 m

Quoted Property 5.0 4.5 -0.5 0.90 0.2 1.04 -1 m

Equities 50.0 55.2 5.2 1.10 4.7 1.09 0 g

Total Offshore 20.0 22.6 2.6 1.13 2.6 1.13

Offshore Equities 15.0 17.6 2.6 1.17 2.6 1.17 0 g

Offshore Bonds 5.0 5.0 0.0 1.00 0.0 1.00 0 g

Offshore Cash 0.0 0.0 0.0 - 0.0 - 0 g

NewGold 2.5 2.0 -0.5 0.80 -0.5 0.80 0 g

Total 100.0

Updated: 2nd Oct. '12 on 30th Sept. '12 closes.

Intended tilt changes

over next 3 months.

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Commentary

Cash Higher risk justifies incrased cash holding.

Bonds Bonds ran hard - retain underweight.

Quoted Property Bond yield prospects calls for caution on listed property…

Equities We remain overweight…

Offshore Equity Appealing from current levels; our preferred overall asset class - overweight…

Offshore Bonds In spite of global sovereign debt concerns its lack of correllation with domestic equities justifies a

fairly high holding - retain neutral..

Offshore Cash Not worth while…

SA Resources Potential for PER rerating coupled with weak earnings prospects suggests a neutral allocation to be

justified.

SA Financials Good prospects from oversold levels; still our preferred domestic equity sub-sector…

SA Industrials Demanding PER; recommend underweight to neutral

SA Med/Small

Companies Increasingly appealing as a late-cycle runner…

Not-my-base case Early domestic interest rate hike…

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Diversify

Top10 APN, ASR, AVI BTI, DSY IPL, IVT MPC, NPN, SHP

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Have a plan

“No guts No glory!” Sir Francis Drake

Trades are fairly short-term (S) in duration (2 days – 6 weeks)

Signals are mainly technical in nature (T)

Look for a 3 –5 % move on underlying (U)

So depending on gearing we hope to achieve a 30% - 60% move on geared position (G)

Look for at least a 2:1 return/risk pay-out (preferably a 2.5:1) (R)

Exit (E), we always set take-profit and stop-loss levels. Usually dictated by technical levels I.e.

previous support/resistance levels

Sometimes use (A) trailing stop. Once we are in the trade we may take profit early if market

conditions or the share’s price action dictates

Prefer the liquid (L) stocks, unless we have a very strong signal

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Investment Style

• Active vs Passive Investment

Time frame

• How much time do you want to spend on investing?

• How active do you want to be?

• When do you need your invested monies?

Risk tolerance

• Various instruments have different degrees of risk

• Are you comfortable with short term decreases in investment value

Reasons for becoming a trader

• Results-orientated trader vs ego-driven trader

What kind of Investor are you?

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Pitfall 1: Not having an exit plan before buying

Pitfall 2: Portfolio imbalances

They purchase entirely too large a position in a single stock.

They do it all at once.

Pitfall 3: Failing to cut losses

Pitfall 4: Selling too soon

Pitfall 5: Buying shares that continue to fall

The slide will end. A surprising few number of shares never do until they become worthless.

Timing of when and at what price the share’s slide will end.

Pitfall 6: Adding additional loosing shares to your portfolio

Pitfall 7: Emotional attachment to a share

Once you have sold a stock, forget it, whether it was sold for a profit or a loss.

Trading Pitfalls!

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The Traders Creed!

You and you alone are responsible for:

all your actions.

all trades that you make.

doing your own research, due diligence and analysis of trends,

markets and specific shares.

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Mark Weetman

Vunani Private Clients

[email protected]

011 384 2920/30