We know that the stock market goes through cycles just like the weather goes through Winter, Spring, Summer and Fall. When the market goes up during a rally, it will always go down during a correction. Similarly, after every correction, it will go back up again. Although stock markets go up and down, it goes higher over time. Over time, it makes higher highs and higher lows, leading to a long term uptrend.

As the stock market goes through its cycle, investors ride a rollercoaster of emotions; from Excitement to depression. By feeling the emotional pulse of the market, you can roughly guess where you are in the market cycle. The point of maximum investment opportunity is when the market is feeling ‘Panic’ and ‘Disbelief’. This is when stock prices are near the bottom or at early recovery. The worst time to invest (maximum risk) is when the market is feeling ‘optimism’ and ‘Excitement’. This is when stock prices are high and ready for the big fall. So, where do you think we are right now in the cycle?

This is a quick update on my views about global markets and my strategy moving forward.

Since the Dow Jones, Straits Times Index and Hang Seng crossed their 400 Day Moving average 2 months ago, all three indices continue to be in a confirmed downtrend. After holding up very strongly for the last 2 months, KLCI and Jakarta CI finally broke their 400 Day MA 3 days ago as well, officially putting ALL INDEXES into a downtrend. As long as these indexes remain below their 400 Day MA, the momentum leans towards the DOWNSIDE. As I have always said, don’t fight the trend. Wait for a reversal of trend before ever deciding to go long on the market.

Stocks Continue to Look Cheap and Attractive But…

As value investors, many stocks look very cheap indeed. In fact, there are many small caps like Xtep, Breadtalk, Goodpack, China Minzhong and large caps like UOB, Capitaland, SMRT that are selling way below their intrinsic values. In times of fear, fundamentals and valuations tend to get thrown out the window. For example, despite growing profits at over 50% YOY and having relatively low debt, China Minzhong is selling at a PE of 5.

Pure value investors (who do not bother with studying charts and trends) would start buying at this stage. If you have been following the news, Warren Buffett has been aggressively buying stocks in Bank of America, MasterCard, Verisk Analytics and Tesco since August 2011. While there is nothing wrong with this approach, I believe you can minimize short term paper losses and maximize your returns by waiting for the downtrend to reverse into an uptrend. No point buying now and ‘constipating through the volatility and more potential downside’.

Those of you who have been following my emails would know that I have sold more than half my stocks in August and holding just some small positions in Singapore stocks. My short term strategy is to just HOLD at this point. I will start to add and buy when I start seeing the 2 week EMA crossing over the 5 week EMA for individual stocks and adding more when they cross the 200 Day MA. I am also waiting to go short on Gold if it continues its decline and breaks its long term trendline and when the Moving averages confirm a downtrend signal. I have been waiting to short the gold bubble for a long time.

How Much Lower Can Stocks Go?

Last quarter’s earnings reports from companies have been strong. Many companies are still delivering double digit growth year on year. This strong earnings and low stock prices have pushed the PE of the indexes to very attractive levels. The PE of the STI is now 7.8, the PE of Hang Seng is 8.6 and the PE of the S&P 500 is 11.8. Eventually, when confidence returns, PE’s will adjust back to the 15-20 x level.

What is holding investors back is the fear that if European leaders are unable to contain the sovereign debt crisis, it could trigger a second financial crisis and the collapse of European banks, which would in turn drag down International banks with European exposure. This would in turn lead to a global recession. In this worse case scenario, stocks could fall another 30% before bottoming. So if you are holding stocks right now, do be psychologically prepared for this.

Earnings seasons (October) is starting again so we have to see if companies can continue to deliver earnings growth, against the backdrop of global economic uncertainty. The good news is that over the last 3 months, company directors have been buying back shares and companies have been buying back shares, a sign that insiders believe that their companies are worth a lot more than what the market is pricing in. Berkshire Hathway (Buffett’s company) has juts announced a share buy back programme for the first time since 1965. In Singapore, companies like Capitaland have also initiated buy backs for the first time in history.

Recessions Create Millionaires

Some people will end up benefiting from this crisis while many will end up as losers. Those that sell at low prices, make losses and fear ever going back in will be the biggest losers. Those that look to the future and can look beyond this crisis will realize that what goes down, MUST GO UP eventually will be the big winners.

Always remember that every crisis will end. Fear cannot last forever. When confidence comes back, stocks of good companies will return to their former highs and climb even higher. Capitaland (selling at $2.50 today) will return to $4.50 and beyond. Goodpack (selling at $1.55 today) will return to $2.20 and beyond. The Straits Times Index (at 2,700 points today) will eventually climb to 3,300 points and beyond etc… You have to be patient and BE IN THE GAME when the market starts its recovery and rally. If you are in the right stocks at that time, you will see 50%-200% gains in your portfolio. More experienced investors who know how to leverage with CFDs, can achieve 500% on their positions. Don’t attempt to predict when this will happen. No one knows. Just keep watching the charts and let the Moving averages and trends confirm your entry!

During the recent Wealth Expo, I mentioned that many high quality stocks are currently very undervalued as the result of the sell-off stemming from fears of a recession. However, the safest time to buy such stocks would only be when they reverse from a downtrend into an uptrend. As long as the stock price is on a downtrend, it is always wise to avoid buying. In the short term, you never know how low it can go.

So, what signals an uptrend? How reliable are these signals? There are a few indicators I look at to help me determine a trend change.

1) 50 Day Moving Average (DMA) Crosses above 150 Day Moving Average (DMA)

When the 50DMA crosses above the 150DMA, & both MAs start rising, it signals an uptrend (buy signal)
When the 50DMA crosses below the 150DMA, & both MAs start falling, it signals a downtrend (sell signal)

AND/OR

2) Stock price (daily candles) crosses above 200 Day Moving average (DMA)

When the daily candles cross above the 200DMA, & the MA starts rising, it signals an uptrend (buy signal)
When the daily candles cross below the 200DMA, & the MA starts falling, it signals an downtrend (sell signal)

This is what it looks like visually…. 50 DMA (blue), 150DMA (green), 200DMA(red)





The shortcoming of this technique: The 50,150,200 DMA are medium/long term indicators that react more slowly to a trend change. Hence, they may not maximize profits as much as a shorter term MA. However, they are more reliable with less false breakouts.

3) 2 Week Exponential MA (EMA) crosses above 5 week exponential MA (EMA). I.e. Change chart to WEEKLY CANDLES

This other approach uses a shorter term MA. Hence, it results in higher profits. But, it is less reliable and creates more false breakouts.

How it works:
When the 2 week EMA crosses above the 5 Week EMA, & both MAs start rising, it signals an uptrend (buy signal)
When the 2 Week EMA crosses below the 5 Week EMA, & both MAs start falling, it signals a downtrend (sell signal)



How Do the two approaches compare? Well, the 2week/5 week crossover always results in higher profits than the 50/150/200DMA. However, the 2week/5 week crossover creates many more buy/sell signals and more false breakouts. If you have more time to monitor your stocks, use the 2week/5 week. If you have less time, use the 50/150/200 DMA.

In a good quality, upward trending stock like Goodpack, both approaches makes you good profits, and protects you from getting killed on the downside. I drew up a profit/loss table using both approaches on Goodpack. This approach also assumes an initial investment of $10,000.



In an inconsistently performing range stock like Exxon Mobil (XOM), you can see below that the 2week/5week still gives a higher return than the 5-/150/200 DMA, but the win/loss ratio drops to 50%.




Note that although the WIN/LOSS ratio is 50/50 on the EMA approach and 33+/66+ using the DMA approach, you are still profitable if you CONSISTENTLY follow the buy/sell signals as the gains outdo the losses. If you combine Moving average signals with SUPPORT and RESISTANCE lines, you have an even higher probability of making very consistent profits. This is why we spend at least 8-9 hours on technical analysis during Wealth Academy.

Before using these technical-trend identifying techniques, it is very important that you select the right stocks or the right companies in the first place. When you select a high quality company like Goodpack, your rate of return is very high and your Win/Loss ratio is exceptionally high as well. This is where fundamental analysis comes in. In Wealth Academy you are going to learn a 10 step process on how to identify fundamentally strong stocks that are undervalued. When you combine fundamentals + technicals, you will start to make superior and consistent returns from your investments. I look forward to teach you more.

Recently, Warren Buffett announced that US stocks were very cheap and that he was buying aggressively again. Should you as an investor blindly jump in and take the cue from the world’s greatest investor and one of the world’s richest man? Yes and no. It all depends.

First let me say that I am one of Warren Buffett’s biggest fans and admirers. Studying his strategy of buying high good quality companies at huge discounts to intrinsic value has made me a lot of money in the last 10 years. He is known as the world’s greatest investor and has achieved an amazing track record. However, I have found that following his strategy ALONE can be very dangerous to most small time investors. Let me explain.

When Warren Buffet invests in a stock, he only focuses on the company’s fundamentals. This means that he looks for companies with a good business model, consistent earnings growth, competitive advantage, low debt and good management. He buys as long as the company’s current stock price is selling BELOW the true value of the stock (intrinsic value). He does NOT study the price pattern on the stock chart at all (known as technical analysis). He also does NOT take into account macroeconomic data like interest rates employment and inflation data.

Why does he do this? The reason is because when Buffett buys a stock, his minimum holding period is 10 years. So he does not care about the short and medium term trends that you can see from a stock chart. However, by using technical analysis, we can see if the stock price is on a downtrend or on an uptrend. When a stock is on an uptrend, it means the market psychology is optimistic and prices tend to move higher (upward momentum). When a stock is on a downtrend, it means the market is pessimistic and prices tend to go lower (downward momentum). The danger is that when a stock is on a downtrend, you do not know how low it can go. A cheap stock can become EVEN CHEAPER. In a downtrend, ALL stocks go down, both good and bad companies. No matter how good or cheap a stock is, a downtrend will always send it lower.

Warren Buffett does not take this into account at all. Can you follow his style? Yes! However, you may buy a stock on a downtrend that goes 20%-50% lower before eventually rising years later. If you are prepared to hold for 10 years and not less, then no problem. However, if you want to achieve higher returns in months and not 10 years, it makes sense to combine Buffett’s fundamental investing methods with technical analysis strategies used by other gurus like George Soros & Victor Sperandeo. Technical analysis helps you to better time your entry. While technical analysis is not 100% full-proof and while you can never buy right at the bottom and sell right at the top, it certainly improves your chances to buy NEAR the bottom, at the beginning of an uptrend and to sell NEAR the top, at the beginning of a downtrend.

When I started combining technical analysis strategies with Buffett’s value investing approach, I found that I have been able to make more money in a shorter period of time. At the same time, when stocks went on a downtrend, I was able to get out earlier and not see my investments fall 20%-60% before it would come back years later!

Let me give an example with a stock that has made me alot of money… Goodpack, listed in Singapore. Goodpack is a very good company that passes all of Buffett’s investment criteria (consistent earnings, low debt, competitive advantage, good management). This stock has an intrinsic value of $2.20+. In Wealth Academy, I teach my students how to determine intrinsic value using a discounted cash flow method.

Look at Chart X below. If you just purely use Buffett’s method of value investing (buying a good company when it is undervalued), you may have invested at point A, when the price is $1.60. It is definitely undervalued. However, what happened? 6 months later, the stock price went to $0.60 because of continued bad market sentiment. A cheap stock became EVEN CHEAPER! As a pure buffett follower, you would just hold for the long term. Sure enough, 1.5 years later, the price went back to $1.60. You had to wait 1.5 years just to break even!!! 6 months later, you would have made a profit when the price went to $2.20 (the intrinsic value). There is nothing wrong with this method except that it takes too long to make money.

CHART X

Now, look at Chart Y below. Using technical analysis, you would know that you should never buy on a downtrend. You must always wait for the price trend to REVERSE into an uptrend before buying. When a stock is on a downtrend, you never know how low it can go. This is driven by emotional psychology of fear and greed. A stock is on a confirmed downtrend when it breaks below the 200 Day moving average (the red line) and confirms a reversal into an uptrend when it subsequently breaks above the same 200 Day moving average.

CHART Y

If you had known this, you would never have bought at $1.60 when it was on a downtrend. You would wait for the trend to reverse into an uptrend and buy at the NEW POINT A, when the price is $1. Immediately you would have ridden the uptrend all the way up to the top at $2.30. You would have locked in profits and sold when the price cut the 200 day MA & reversed back into a downtrend at $1.90 (NEW POINT B). This would have given you a 90% return in just 15 months!

This is why in my Wealth Academy boot camp, I do not just teach Warren Buffett’s value investing strategy. Instead, Conrad and I teach our students ALL THE INVESTMENT STRATEGIES used by top investors & traders like George Soros, Victor Sperandeo, William O Neil, Philip Fisher and John Paulson. To be a successful investor, you have to learn fundamental analysis, technical analysis, Macroeconomics and sector rotation. When you combine the very best strategies of many investment experts, you take their best ideas and leave out their individual shortcomings.

Just to give you another example of why you should not follow Buffett’s methods blindly. In October 2008, He announced to the press that he was buying American stocks. What he did not know was that stocks were STILL ON A DOWNTREND.

What happened? Stock prices continued to decline 30% over the next 5 months!

So, although Buffett is bravely buying stocks now (i.e. August 2011), I would suggest that you wait for the downtrend to reverse into an uptrend first before you enter the market. In my coming Wealth Academy programmes, this is exactly what I will be teaching my students. Although stocks ARE very cheap now (undervalued), they can become much much cheaper if the downtrend persists!

From October 2007 to December 2008, stock markets around the world suffered their biggest fall since the great depression. The US Market (S&P 500 Index) fell 55%, Singapore and Malaysia fell 60%+ and China Stocks (Shanghai Composite Index) fell 70%. Stocks like UOB fell from $28 to $7 and Citigroup fell from $60 to less than $1. The collapse of subprime mortgage securities caused worldwide panic and the forced selling of billions of dollars worth of shares.

In January 2009, together with CNA reporter Ryan Huang and Millionaire Trader Conrad Lim, I launched the Book ‘Profit from the Panic- How to Make Your Fortune from the Greatest Financial Crisis Since the great depression’. I then went on Channel News Asia to inform people how cheap stocks were at current levels and that anybody who invested at these distressed price levels would leap great gains once markets recovered.

Within 2 months, the stock market boom began. The US market rallied 90%+ in 22 months while the Singapore STI jumped over 110% in that same period.

My book became a #1 best-seller at Borders and more importantly, my investments made me over $3 million+. More importantly, my students and readers who took action made their fortune as well.

It was NOT a prediction or a guess. It was plain common sense based on the study of the history of stock markets. Over the last 80 years of data has shown that every time stocks plunged from emotional panic, they will eventually recover to much higher levels. Every crisis will end. At the end of every crisis will pave the way for the next financial boom. People who invest in high quality companies at distressed prices would become millionaires when the boom came. “Recessions create millionaires”. In fact, during the last financial crisis, the number of millionaires in Singapore increased by 32.7% because of their investments.

The Panic is Happening Again

On 5 August, the S&P credit rating agency downgraded the US government’s debt and the fear of another recession has sent people to panic once again. In a week, US stocks have plunged 16%, Singapore stocks are down 19% and Hong Kong stocks are down 18%. This is despite the fact that companies earnings have posted record earnings growth. This sell off is purely driven by fear and presents another great investment opportunity to PROFIT from the PANIC AGAIN!

How Do You Profit from the Panic
Those that sell during these emotional panics and STAY OUT OF THE GAME will be the BIGGEST LOSERS. Those that do nothing will be the BIGGEST LOSERS. Those that hold onto stocks of LOUSY COMPANIES will never see them ever recover. Smart investors who buy the stocks of the RIGHT COMPANIES and AT THE RIGHT TIME will have the greatest opportunity to make huge profits when the markets recover.

To make your fortune from this market crash, you have to know…
1) How to choose stocks of high quality companies that will be the first to rebound when the market recovers?
2) Which markets to invest in and which to avoid. US? China? Hong Kong? Jakarta? Malaysia?
3) When is the safest time to get back in?

These are all the insights and strategies you are going to learn at the coming Singapore Wealth Academy Expo 2011 (August 20-21). We have got 9 investment strategist specializing in property, stocks, commodities, options and forex to guide you.

You can still grab your tickets for this must-attend event at www.waexpo2011.com. Tickets start at $99 only.

Be Responsible for Your Own Financial Destiny
I feel the most sorry for the elderly and the uneducated. They will be the ones who suffer the most in recessions and stock market crashes. However, if you are someone who is educated, you owe it to yourself to financially educate yourself. You have no excuse to lose money and to not make huge profits for yourself. I started teaching money skills 7 years ago because I feel it isn’t fair that only 10% of the population gets to become rich. I feel that it isn’t fair that the knowledge of money and investing lies in the hands of a few. All of us deserve to be rich and successful. However, it is up to you to take action and help yourself first. When you can help yourself, be sure to help the elderly and the uneducated with your donation of time, money and knowledge. They need to be helped as well.