Charting an investment strategy for 2014

By Kenneth Robson on January 1, 2014 • ( 1 )

Disclaimer

This first post for 2014 looks at investment prospects for the coming year mostly from a technical perspective.

The opinions expressed are those of one observer only based on the charts examined, and are therefore prone to observer bias and error.

Technical analysis (TA) depends on historical data, but looking at the past may provide clues about how markets will behave in the near future. Such insights suggest what might happen, but cannot possibly foretell what will happen.

The only rational approach is to continue to watch the charts as the price action unfolds, modifying one’s strategy as needed.

The long-term picture (monthly chart 2001-2013). TA observations

Still recovering from the GFC

Australia may have been innocent of the misdemeanours that lead to the GFC (global financial crisis), but the impact on our markets has lingered longer than in the US where the problem arose.

My forecast a year ago was for the ASX 200 to reach 5400 by the end of 2013 based on the 61.8% Fibonacci retracement level. This was attained by October 2013.

Although the index then weakened, the retracement respected support at 5000 in December and finished the year at 5352.20.

The candle-stick appearance for the month of December was a “paper umbrella” with a small real body and a long lower shadow. This rejection of lower prices augurs well for higher prices to come.

During 2013 the XJO (ASX 200 Index) remained in an uptrend despite retracements in May/June and in Nov/ Dec. The overall gain for the year was 703.30 points (from 4648.90 to 5352.20) for a 15% gain.

The bogus months of September/October passed without concern. They were in fact months of solid market gains. A number of companies chose this time to raise additional capital through the issue of share rights. By and large these issues were well supported and this may help explain the unexpected resilience of the market then.

The RSI finished the year at about 64, just below the over-bought zone at 70. Further retracement is possible but probably not likely.

Outlook for 2014

Bullish considerations

Out-performance in 2013 with a 15% increase in the ASX 200 index, the momentum of which is likely to continue in 2014.
A falling A$ (a RBA objective) would be bullish for the Australian market.
Successful capital raisings in 2013 and a pipeline of IPOs for 2014, should insure a continuing inflow of funds to the market
Twitter shares ended the 2013 year at US$63.65 (A$71.41) up 145% on the US$26 offer price after début on Wednesday November 6 confirming an eagerness for new issues.
The Dow-Jones Industrial Average has far outstripped the Aussie market and finished the year on a 52nd record high, at 16,576.66 up 72.37 points to finish the year 26.5% higher; the best in 18 years.
The US markets now seem to have dropped their opposition to reining back Quantitative Easing.
Dow observed that most bull-markets take about five years to run their course. This one is about 18 months into its life.
Many under-performing companies have undergone restructuring now, reduced debt after raising fresh capital, and seem to be set to record improved profit results in 2014.
There is an expectation that mining and energy stocks will be more profitable without the carbon and MRRTs taxes.
The housing industry is showing new signs of life, and the construction sector likely to receive boosts from increased spending on infrastructure.

Bearish concerns

Although the outlook may be generally bullish for 2014, there are always some aspects that cause concern, and need to be watched.

This need not affect the market as a whole. It may be sector specific. For example some analysts consider the technology sector to be over-heated at present.
Some of the recent IPOs in the US e.g. the Twitter début have resulted in bubble-like excessive prices being paid and executives receiving overly generous considerations.
Sovereign debt concerns for some countries could resurface.
Should the easing of QE result in too much tightening of capital, the markets may well react negatively without warning.
One should always take into account the chance that unforeseen or other unknowable problem will arise.

Adumbration for 2014

The important question is whether the market on the balance is bullish or not still. If it is, then it should be safe to stay pretty well fully invested, and to consider gearing prudently to increase returns.

The likelihood is for a continuing upwards trend. The next target if this continues is to reach the pre GFC high of 6851.5 by the end of the year.