As you would know, first quarter earnings reports have been much better than expected. That has re-ignited the upward momentum and provided a strong boost to the stock market after a small correction in April. In fact, the market is at its highest level in 2012 and just shy of its ALL TIME HIGH of 2007 October.

Earnings to Date
Over half of the companies in the S&P 500 have reported first quarter earnings – 275 out of 500. Earnings are on track for a 7% gain compared to the first quarter of 2011.That is much better than the 1% to 3% expectations prior to the start of the reports. An unusually large number of companies has reported earnings above the average Wall Street forecast. The star performer was of course Apple, that reported a blowout profit growth of 91%.

Strong Revenue to Accompany Strong Profits
The 7% earnings gain has been accompanied by revenue that is on track for about a 5% gain for the S&P 500 in aggregate.
That 5% is better than expected and much better than feared. A 5% overall revenue gain compares to nominal US GDP growth of about 4% over the past year. The 7% earnings growth in conjunction with 5% revenue growth also means that profit margins are still rising.

Technology, Financials and Industrials Have Been the Best Sectors
Technology, not surprisingly, has posted an impressive earnings gain. Thank Apple for the outsized 15% earnings growth trend in that sector. Technology leaders like Apple and Google have pulled back, giving me the chance to re-enter before it continues its uptrend. It is on my conviction watchlist again.

That sector is not the biggest gainer, however. That prize goes to the industrial sector. Industrials are on track for a 15% to 19% gain, which confirms that the US manufacturing rebound is real.

The only other double-digit increase comes from financials, which are heading towards a 10% increase. Despite the fact that banks have cleaned up their balance sheets and reported profitability, many are still selling at 50%-80% of their Book Value. For that reason, I am still convicted that Citigroup, Bank of America, Morgan Stanley and Goldman Sachs have tremendous upside from present levels.

Earnings Growth of 7% Can Support Further Market Gains in 2012
A 7% earnings gain for the first quarter would represent a slowdown in growth from the 14% growth for 2011 over 2010. Still, 7% earnings growth is good, and over time growth at the rate would certainly lead to a rising stock market.
In fact, valuations are low enough that 7% earnings growth for this year would justify high double-digit gains in the S&P 500 for 2012. Given that the S&P 500 was flat in 2011 despite 14% earnings growth, the market is still lagging behind earnings growth. It will have to catch up eventually. A 6% earnings gain this year would mean that the S&P 500 index could rise 20% in 2012 and valuations would still only return to the reasonable levels that existed at the beginning of 2011.

Economic Numbers
The only concern holding the market back from moving much higher would be of course the sovereign debt fears in Europe, with Spain and France now coming into the hot seat. Economic news have also been mixed thus far. Employment data has been disappointing and
housing sales and prices remain weak. However, consumer spending has remained strong. Most importantly, first quarter real GDP rose at a modest 2.2% annual rate. The risks to the earnings outlook have kept the stock market reaction to the solid earnings reports in check.

Looking Forward
As earnings season winds down the next week or two, the focus could shift to European concerns. The typical “sell in May and go away” mentality could increase, given the difficult times the stock market experienced each of the past two May-Oct Periods (2010-2011) despite a strong underlying bull market. I remain bullish long term on stocks because of the relatively high earnings yield on stocks compared to bonds. First quarter earnings reports have confirmed my thesis.

Although we have just entered the dreaded period of MAY, I am not attempting to predict the market and will continue to hold my stocks as long as the uptrend remains intact. Although there has been a May selloff 61% of the time based on history, this year may be different.

Historically, since 1932, some of the best market gains have come during the summer months ahead of a presidential election. This year happens to be the US Presidential Election Year.

Median Gains During Election Years Since 1932
May 1.09%
June 1.88%
July -0.67%
Aug 0.87%
Source: Sean Clark, Clark Capital Management
Of course, history doesn’t always repeat itself.

As a result, the Singapore STI broke through the 3,000 barrier once again and is also affirming the uptrend that started just this month.

My personal opinion is that we are just at the beginning of the bull run and there is a lot more upside from here. There could however be a usual pullback in May (the usual sell in May, Go Away seasonality pattern- usually a 61% chance of it occurring based on history). Historically, April is usually the most bullish month for stocks historically. So we have at least one more good month to go before markets go through a dip.

These are reasons why I think that there is a lot more upside for markets (especially for the US, Singapore, Hong Kong and Shanghai)

1) Markets are still historically undervalued.
Despite the fact that stocks have been rallying aggressively for 4 months, The PE ratios of the Straits Times Index (PE =9), Hang Seng Index (PE = 9+) and S&P 500 Index (13+) are still below the historical median PE of 15 and historical top of 23-25.

2) Technical analysis indicators confirm the uptrend of markets where prices are above the 200 DMA and the 50 DMA have crossed over the 150 DMA. This is a clear sign of a confirmed uptrend

3) The US economy is showing stronger signs of recovery and growth. US retail sales, manufacturing index, employment data, GDP growth have all exceeded analysts and economists forecasts. At the same time, fears that a European sovereign debt default will trigger a second financial crisis has abated. Despite the fact that Greece technically defaulted, markets did not react negatively at all.

4) The Aunties and Uncles (amateur-man on the street- investors) are not fully buying stocks yet. Many are still staying on the sidelines. I can see that they are only just starting to buy now. So there is alot of cash on the sidelines that have not been fully injected into the stock market.

Once the amateurs start to buy aggressively, they will push prices up higher and higher (eventually to unsustainable levels). Meanwhile, they should provide the catalyst to propel stocks higher from here. Remember that once everyone is optimistic about stocks and your auntie starts punting, its time to get concerned. That is not happening yet.

As investors begin to take on more risk, you can expect CYCLICAL STOCKS (e.g. Banks, real estate, commodities, industrials etc…) to start outperforming and DEFENSIVE STOCKS (e.g. SPH, Coke, DairyFarm, ComfortdelGro, McDonalds) to underperform.

5) The Bond Market is finally beginning to sell off after a long, protracted bull run over the last 6 years. What this means is that investors are beginning to sell their bond holdings in order to re-direct their funds into the stock market. This will again provide additional fuel for the equities market.

A Peek Into My Stock Portfolio

Normally, only graduates of my Wealth Academy program will get regular updates on what I think are the best investment opportunities and get the chance to access my live portfolio of stocks.

Here is a sneak peek into what I have invested in over the last few months. Some of my stock picks have already begun to show some great returns while some of my stocks are yet to skyrocket (they all do eventually).

At this point of time, I believe that the best investment opportunities are in US bank stocks and US home building stocks. US banks like Citigroup, Goldman Sachs, Bank of America and Wells Fargo are current selling at up to 40%-60% lower than their Book Value, despite showing a very strong financial position and string earnings recovery. This is a rare opportunity to invest in these banks at 40%-60% discounts, giving you the chance to more than double your money in the months & years to come.

The First Step Is To Invest In Yourself

If you want to learn the strategies of how to achieve consistent profits from the stock market and how to spot the best money-making opportunities, you need to first invest in your financially education. That is why I spent the last 11 years writing books to share my knowledge. These are books like ‘Secrets of Self-Made Millionaires’, ‘Secrets of Millionaire Investors’, ;Profit From the Panic’ and ‘Profit From the Asian Recovery’. You can get these books in local bookshops in Singapore, Malaysia and Indonesia and well as on www.amazon.com.

If you want to become a professional investor and to truly master the art of making money in the markets, you can get live personal training from me and my team of investment strategists at Wealth Academy.

In December 2011, it was clear from my analysis that many stocks were highly undervalued and it was the right time to invest once the stock market reversed into a clear uptrend (as indicated by the moving average signals I teach). As a result, I started investing in many US and Singapore stocks and adding to some of my existing positions.

However many people I know did not dare to invest even though the stock market was clearly showing a clear uptrend signal. Why? Simply because they had read analyst reports from investment experts in well-known financial institutions that predicted that the first half of 2012 will still be bearish and highly volatile. There would only be a possible rally in stock prices in the second half of 2012 they said.

Well, as usual, the ‘Experts’ got it wrong again. From the beginning of January, stocks market started rallying and have made their greatest gains in the last 18 years! Now that stocks have staged their best January performance since 1997, these experts have changed their tune and are now turning bullish. As usual, they always seem to come late to the party. Below is the article from Bloomberg.

Thank goodness I did not listen to them and instead followed my own strategy of staying invested as long as stocks were fundamentally cheap and on a confirmed uptrend. As a result, I have happily been making lots of money while the amateurs have been left out of the opportunity again. This is a sneak peek at my current portfolio.

I am glad that many of my students at Wealth Academy have stuck to their winning investment strategies and have been making nice profits as well. Just received a nice email from one of my students below who made $6,000+ in the last 2 months.


Although some people may believe that markets are still overbought in the short term, I believe that we are just at the beginning of a sustainable uptrend for the rest of the year (barring any unforseen collapse in the Euro or a war in Iran). I stick to my thesis that Singapore and Shanghai will outperform this year with certain sectors in the US markets with still a lot of appreciation potential.

The US market remains on its confirm medium term uptrend. Singapore’s STI and many Singapore stocks are still on a short term uptrend but the medium term uptrend is not confirmed yet. Have to wait for a few more days to see a confirmation. This is why I have currently more invested in my US positions than my Singapore ones. That will change once the local stocks confirm their uptrend.

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?

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!

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!