Thursday, 30 August 2012

Weak data send European stocks lower Carrefour jumps after narrowing first-half loss

Weak data send European stocks lower

Carrefour jumps after narrowing first-half loss


LONDON (MarketWatch) — European stock markets dropped on Thursday, following a raft of weak macroeconomic data, while investors also got jittery a day before a much anticipated speech by U.S. Federal Reserve Chairman Ben Bernanke. 
                                                                                                 By Sara Sjolin, MarketWatch 

“There are concerns that we’re moving into a season of storms, and not just in relation to the weather, and markets are always more volatile in that period,” said Justin Urquhart Stewart, co-founder of Seven Investment Management.
“We can see that we have the German constitutional court decision, Dutch elections, the Jackson Hole meeting and the ECB meeting ahead of us, so there’s a series of potential mines that could go off,” he added. He stressed, however, that “we are seeing some fundamental changes since months ago,” when people feared Greece would exit the euro zone.
The world’s biggest advertising firm, WPP PLC, UK:WPP -2.83% posted one of the biggest losses in the pan-European index, off 3%, after cutting its revenue forecast for 2012 and reporting mixed first-ha
Pointing in the other direction, French food retailer Carrefour SA FR:CA +7.59%  jumped 7.6% as it narrowed its first-half loss from the year-ago-period, even as operating profit dropped because of pressure on key markets.

Bernanke

For the broader European stock markets, investors pulled out of equities as they awaited Bernanke’s Friday speech at the Jackson Hole, Wyo. meeting, where any comments about the economy and prospects of further stimulus will be scrutinized.
“Bernanke is not going to come out with any policy announcements yet. He has the ability to do much more quantitative easing than anyone else, because it’s a reserved currency, but he won’t do it until he necessarily has to,” Urquhart Stewart said.
“We will see some political changes being made before he commits more money,” he said.
Weak Japanese retail sales further added to market worries, underpinning concerns of slower global growth. See: 
Meanwhile in Europe, the number of unemployed Germans grew by a seasonally adjusted 9,000 in August, above analysts’ expectations of an 8,000 rise. 
The European Commission said its euro-zone economic-sentiment indicator fell to 86.1 in August from 87.9 in July, as all the sector indexes declined.
In Italy, stocks erased a loss after the Treasury succeeded in mostly lowering borrowing costs at 5- and 10-year bond auctions. 

 

Wednesday, 22 August 2012

8 strategies to protect your investments

BOSTON (MarketWatch)—I don’t know about you, but I’m a little bit nervous. The Standard & Poor’s 500 is trading close to a four-year high and the only good reason for that, it would seem, is this: Stocks like to climb a wall of worry.
My guess, however, is that if you’re like me, you might want to a little downside protection right about now. After all, it seems more likely the market will fall rather than rise significantly from current levels. So what are some good ways to protect your portfolio, and gains if you have any?
1. “Insure” that portfolio
Well, for some, times like these call for standard off-the-shelf tools and techniques. They recommend buying ETFs that short the market, or buying puts, or selling covered calls.




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To be fair, however, not all advisers are fond of this approach. “There are certainly techniques known as ‘portfolio insurance’ that employ the use of different kinds of options—buying and selling index options can be used to minimize the downside risk of a diversified portfolio,” said Dave Yeske, a managing director of Yeske Buie. “But we believe these techniques are too expensive and don’t add value in the long run.”
According to Yeske, the very use of the term portfolio “insurance” is a bit of a misnomer. “This is not insurance in the same sense as life insurance or homeowners insurance,” Yeske said. “These kinds of insurance protect you from irrevocable loss. A human being who dies prematurely does not rise from the dead. A house that burns down does not spontaneously rebuild itself. A portfolio, on the other hand, will rebuild itself after a cyclical downturn.”
Buying options as “insurance” represents an expense, not an investment, said Yeske. “Options, after all, are a wasting asset and a zero-sum game,” Yeske said. “Better to build resilience into your portfolio in other ways, like allocating an adequate amount to cash and short-duration, high-quality bonds. Any loss in return potential from owning cash and bonds will be less than the cost of ‘insurance’ and will allow you to leave your equities unmolested during a cyclical downturn.”
Still, there are times when Yeske uses portfolio insurance. “For example, when a client holds a large, undiversified position in restricted employer stock, we will use options to protect this client from the short-term downside risk they face until the restrictions are lifted and they can liquidate the position in favor of a more diversified portfolio,” he said.
2. Seek return of capital
Another way to create some downside protection is to seek safe havens. Rob Schmansky, of Clear Financial Advisors, said U.S. Treasuries, cash, or income annuities provides short-term downside protection in nominal terms. “If there’s one place investors run to it’s a guaranteed return of principal,” Schmansky.
Meanwhile, Stephen Smith, a vice president at Noesis Capital Management, uses a different approach with his client base, clients who, he says, “place a premium on capital preservation with the goal of growing their assets over time within reasonable risk parameters.”
3. Don’t stay fully invested
“We do not have a mandate to always be fully invested,” said Smith, who manages separate accounts. “There will be periods when it is best not to be fully invested.”
The key is to manage risk first and foremost, Smith said. He also noted that one key difference between separate accounts and mutual funds is this: Many mutual funds must remain fully invested and that’s not the case for separate accounts.
4. Sell even when you don’t have something to buy
Just because you don’t have something else to buy doesn’t mean you shouldn’t sell. If the a stock or ETF or mutual fund has hit your price target, move on. “We will never delay selling a stock that needs to be sold because we don’t have a suitable replacement at that moment,” said Smith. “The buy and sell decisions are separate and distinct.” 
5. Stop losses
Smith’s firm uses a trailing stop-loss for all positions. “This approach is both technical and fundamental; not a fixed percentage decline from a high-water mark,” Smith said. “The key is to not let a small loss become a large loss if at all possible.”
6. Look at things from all angles
Some investors use a top-down approach, others a bottom-up approach. Consider instead using both a top-down and bottom-up analysis. “We strive to stay aware of macro factors, while depending on fundamental and technical analysis of company and industry dynamics,” Smith said. “As such, we may have zero exposure to an industry or sector at times.”
One example Smith gave is this: In March 2007, his firm sold all bank stocks and all but one financial stock. And that was at time when the financial sector comprised 22% of the S&P 500 weighting. This remained the case until mid-2009.
7. Use common sense
Smith also said that his firm tries to use common sense when evaluating new ideas, as well as current holdings. “We do not hold ourselves out as market timers, as we do not have a timing model that dictates cash levels or that measures market volatility,” said Smith. “We do employ quantitative screens to narrow a large universe of stocks down to a smaller list companies that we then research in greater depth. We try to be opportunistic in our purchase point, and we trim positions back as they grow to be relatively large holdings in the portfolios.”
He said one example of this is Apple AAPL -1.37%  which his firm trimmed in late March 2012 after a strong rally. “This element of risk control keeps a position from getting too large and having an inordinate impact on performance, in the event of a major correction in the stock,” said Smith.
8. Diversify, diversify, diversify
“We think the best approach to downside protection is simply to maintain a broad and appropriate degree of diversification; across asset classes, within asset classes, globally, and across different currencies,” said Yeske.
Schmansky also said diversification may provide some benefits, but it isn’t bulletproof. “We saw in the ‘lost decade’ of the stock market that holding an allocation to bonds, real estate, and a diverse portfolio of stocks actually provided a nice annual return as compared with the 0% return of the S&P 500,” he said.
Read Schmansky’s article that showed how diversification across assets let to a surprising result over the 0% S&P 500 return.
Robert Powell is editor of Retirement Weekly, published by MarketWatch. Learn more about Retirement Weekly here .
Robert Powell has been a journalist covering personal finance issues for more than 20 years, writing and editing for publications such as The Wall Street Journal, the Financial Times, and Mutual Fund Market News.

Bllinger Bands



Introduction
Developed by John Bollinger, Bollinger Bands are volatility bands placed above and below a moving average. Volatility is based on the standard deviation, which changes a volatility increase and decreases. The bands automatically widen when volatility increases and narrow when volatility decreases. This dynamic nature of Bollinger Bands also means they can be used on different securities with the standard settings. For signals, Bollinger Bands can be used to identify M-Tops and W-Bottoms or to determine the strength of the trend. Signals derived from narrowing BandWidth are discussed in the chart school article on BandWidth.
SharpCharts Calculation

  * Middle Band = 20-day simple moving average (SMA)
  * Upper Band = 20-day SMA + (20-day standard deviation of price x 2)
  * Lower Band = 20-day SMA - (20-day standard deviation of price x 2)



Bollinger Bands consist of a middle band with two outer bands. The middle band is a simple moving average that is usually set at 20 periods. A simple moving average is used because a simple moving average is also used in the standard deviation formula. The look-back period for the standard deviation is the same as for the simple moving average. The outer bands are usually set 2 standard deviations above and below the middle band.



Settings can be adjusted to suit the characteristics of particular securities or trading styles. Bollinger recommends making small incremental adjustments to the standard deviation multiplier. Changing the number of periods for the moving average also affects the number of periods used to calculate the standard deviation. Therefore, only small adjustments are required for the standard deviation multiplier. An increase in the moving average period would automatically increase the number of periods used to calculate the standard deviation and would also warrant an increase in the standard deviation multiplier. With a 20-day SMA and 20-day Standard Deviation, the standard deviation multiplier is set at 2. Bollinger suggests increasing the standard deviation multiplier to 2.1 for a 50-period SMA and decreasing the standard deviation multiplier to 1.9 for a 10-period SMA.
Signal: W-Bottoms
W-Bottoms were part of Arthur Merrill's work that identified 16 patterns with a basic W shape. Bollinger uses these various W patterns with Bollinger Bands to identify W-Bottoms. A "W-Bottom" forms in a downtrend and involves two reaction lows. In particular, Bollinger looks for W-Bottoms where the second low is lower than the first, but holds above the lower band. There are four steps to confirm a W-Bottom with Bollinger Bands. First, a reaction low forms. This low is usually, but not always, below the lower band. Second, there is a bounce towards the middle band. Third, there is a new price low in the security this low holds above the lower band. The ability to hold above the lower band on the test shows less weakness on the last decline. Fourth, the pattern is confirmed with a strong move off the second low and a resistance break.

Chart 2 shows Nordstrom (JWN) with a W-Bottom in January-February 2010. First, the stock formed a reaction low in January (black arrow) and broke below the lower band. Second, there was a bounce back above the middle band. Third, the stock moved below its January low and held above the lower band. Even though the 5-Feb spike low broke the lower band, Bollinger Bands are calculated using closing prices so signals should also be based on closing prices. Fourth, the stock surged with expanding volume in late February and broke above the early February high. Chart 3 shows Sandisk with a smaller W-Bottom in July-August 2009.

Signal: M-Tops
M-Tops were also part of Arthur Merrills work that identified 16 patterns with a basic M shape. Bollinger uses these various M patterns with Bollinger Bands to identify M Bottoms. According to Bollinger, tops are usually more complicated and drawn out than bottoms. Double tops, head-and-shoulders patterns and diamonds represent evolving tops.
In its most basic form, an M-Top is similar to a double top. However, the reaction highs are not always equal. The first high can be higher or lower than the second high. Bollinger suggests looking for signs of non-confirmation when a security is making new highs. This is basically the opposite of the W-Bottom. A non-confirmation occurs with three steps. First, a security forges a reaction high above the upper band. Second, there is a pullback towards the middle band. Third, prices move above the prior high, but fail to reach the upper band. This is a warning sign. The inability of the second reaction high to reach the upper band shows waning momentum, which can foreshadow a trend reversal. Final confirmation comes with a support break or bearish indicator signal.

Chart 4 shows Exxon Mobil (XOM) with an M-Top in April-May 2008. The stock moved above the upper band in April. There was a pullback in May and then another push above 90. Even though the stock moved above the upper band on an intraday basis, it did not CLOSE above the upper band. The M-Top was confirmed with a support break two weeks later. Also notice that MACD formed a bearish divergence and moved below its signal line for confirmation.

Chart 5 shows Pulte Homes (PHM) within an uptrend in July-August 2008. Price exceeded the upper band in early September to affirm the uptrend. After a pullback below the 20-day SMA (middle Bollinger Band), the stock moved to a higher high above 17. Despite this new high for the move, price did not exceed the upper band. This flashed a warning sign. The stock broke support a week later and MACD moved below its signal line. Notice that this M-top is more complex because there are lower reaction highs on either side of the peak (blue arrow). This evolving top formed a small head-and-shoulders pattern.
Signal: Walking the Bands
Moves above or below the bands are not signals per se. As Bollinger puts it, moves that touch or exceed the bands are not signals, but rather "tags". On the face of it, a move to the upper band shows strength, while a sharp move to the lower band shows weakness. Momentum oscillators work much the same way. Overbought is not necessarily bullish. It takes strength to reach overbought levels and overbought conditions can extend in a strong uptrend. Similarly, prices can "walk the band" with numerous touches during a strong uptrend. Think about it for a moment. The upper band is 2 standard deviations above the 20-period simple moving average. It takes a pretty strong price move to exceed this upper band. An upper band touch that occurs after a Bollinger Band confirmed W-Bottom would signal the start of an uptrend. Just as a strong uptrend produces numerous upper band tags, it is also common for prices to never reach the lower band during an uptrend. The 20-day SMA sometimes acts as support. In fact, dips below the 20-day SMA sometimes provide buying opportunities before the next tag of the upper band.

Chart 6 shows Air Products (APD) with a surge and close above the upper band in mid July. First, notice that this is a strong surge that broke above two resistance levels. A strong upward thrust is a sign of strength, not weakness. Trading turned flat in August and the 20-day SMA moved sideways. The Bollinger Bands narrowed, but APD did not close below the lower band. Prices, and the 20-day SMA, turned up in September. Overall, APD closed above the upper band at least five times over a four month period. The indicator window shows the 10-period Commodity Channel Index (CCI). Dips below -100 are deemed oversold and moves back above -100 signal the start of an oversold bounce (green dotted line). The upper band tag and breakout started the uptrend. CCI then identified tradable pullbacks with dips below -100. This is an example of combining Bollinger Bands with a momentum oscillator for trading signals.

Chart 7 shows Monsanto (MON) with a walk down the lower band. The stock broke down in January with a support break and closed below the lower band. From mid January until early May, Monsanto closed below the lower band at least five times. Notice that the stock did not close above the upper band once during this period. The support break and initial close below the lower band signaled a downtrend. As such, the 10-period Commodity Channel Index (CCI) was used to identify short-term overbought situations. A move above +100 is overbought. A move back below +100 signals a resumption of the downtrend (red arrows). This system triggered two good signals in early 2010.
Conclusions
Bollinger Bands reflect direction with the 20-period SMA and volatility with the upper/lower bands. As such, they can be used to determine if prices are relatively high or low. According to Bollinger, the bands should contain 88-89% of price action, which makes a move outside the bands significant. Technically, prices are relatively high when above the upper band and relatively low when below the lower band. However, relatively high should not be regarded as bearish or as a sell signal. Likewise, relatively low should not be considered bullish or as a buy signal. Prices are high or low for a reason. As with other indicators, Bollinger Bands are not meant to be used as a stand alone tool. Chartists should combine Bollinger Bands with basic trend analysis and other indicators for confirmation.
Bands and SharpCharts
Bollinger Bands can be found in SharpCharts as a price overlay. As with a simple moving average, Bollinger Bands should be shown on top of a price plot. Upon selecting Bollinger Bands, the default setting will appear in the parameters window (20,2). The first number (20) sets the periods for the simple moving average and the standard deviation. The second number (2) sets the standard deviation multiplier for the upper and lower bands. These default parameters set the bands 2 standard deviations above/below the simple moving average. Users can change the parameters to suit their charting needs. Bollinger Bands (50,2.1) can be used for a longer timeframe or Bollinger Bands (10,1.9) can be used for a shorter timeframe. 
Further Studyrors. Look at the same market through 3 different time frames. This corresponds to one above and one below the chart that aligns with the holding period. Each setting produces a different range of band extremes and relative price location within the indicators. Match reward: risk to the central time frame but observe all intervening S/R on the other charts. Consider whether the holding period allows enough time to mount barriers and reach targets at other band levels.

Keep in mind that all bands change dynamically in response to price. This allows continuous feedback that shifts target values with each bar. Experience with this powerful indicator helps swing traders anticipate how it will move. The longer that price travels sideways, the tighter the bands become. Trend change for the bands themselves first begins with a turn by the band closest to the prior price trend. For example, when an uptrend prints along a top band, expect this side of the indicator to turn down before its twin when price moves into a range or downtrend.

Combine Bollinger Band study with momentum-based indicators. This helps filter directional movement from rangebound markets and improves trade timing. Add MA Ribbons to price and display the MACD Histogram across the lower pane. Price often remains well within band constriction during the early phases of new positive feedback events. As these indicators show rising momentum, shift attention to natural pattern/band breakout levels and look for entry within narrowing bars.



To be continued