Keith Richards spoke in a Saturday morning session for Canadian Money Saver on "How to Profit from Fear and Greed". Keith Richards is the Portfolio Manager of Value Trend Wealth Management and World Source Securities Corp. Their site is www.valuetrend.ca. I went because Canadian Money Saver sessions have given good talks in past Money Shows. Their site is www.canadianmoneysaver.ca.
He wrote a book called Smartbounce: 3 Actions Steps to Portfolio Recovery. You can see this on Amazon.
He says you can profit from fear and greed by using the bear-o-meter. What is important is capital growth and preservation; keeping costs low; low portfolio turnover and monitoring your portfolio. There is always risk. Sometimes risk is higher than at other times. We do not know the future but we can measure risk.
The bear-o-meter has 9 facts. There are 2 trend indicators, 4 breadth indicators, 1 value factor and 3 sentiments and 1 scalability. There are 8 points on the bear-o-meter. 8 means less risk and 0 mean more risk.
The 2 trend facts are a downward trend that has lower highs and higher lows and an upward trend that has higher highs and higher lows. The 200 day moving average is more important than the 50 day moving average. So for the 50 day moving average there is plus or minus 1 point and for the 200 day moving average there is plus or minus 2 points.
Breadth participation means that certain stocks have more influence than others. An example is when Nortel was big in the market. You line up the advancing stocks against the declining stocks in an index. If AD is going down and index is up that is bad. If AD is going up and so is the index this is good. It does not necessarily mean the market is going to go down if AD is down and Index is up. If there is a divergence this could mean a problem.
Breadth momentum is percentage of stocks over 50 moving average and are stock trending up or trending down. The site stockcharts.com gives this indicator. You need a wall of worry. If too many stocks are down people are depressed too much and if too many stocks are up people are too happy.
Look at overbought or oversold stocks. The value factor is the P/E Ratio. Overbought or oversold is shown by P/E Ratio of less than 13 or greater than 25. So oversold is a stock with a P/E Ratio of less than 13. An overbought stock would be one with a P/E Ratio greater than 25. If the P/E Ratio is greater than 25 there is more risk.
Sentiment investing is contrarian investing with smart money and dumb money. Warren Buffett and the Teachers Fund are smarter than us. What are the smart people doing? What are the dumb people doing? The dumb people are us. Smart selling and dumb buying is a problem. You can get information on sentiment trading at sentimenttrading.com for $600 a year.
VIX Options is trading volatility. If the VIX options are too high then people are too pessimistic or too scared. If VIX options are too low then people are too complacent. They are not scared enough. When people are too complacent then there is more risk. VIX Option puts are bearish and VIX Option calls are bullish. If there are too many puts it is a sign people are too scared.
There are seasonal best 6 months and this has held from 1950 to 2016. The best 6 months is from October 28 to May 5 when investments will grow. The worst are from May 6 to October 27 when you will get investment losses.
If the bear-o-meter is at 3 it means that there is higher risk and we are on the cusp. Bearish numbers are 0, 1 and 2. Bullish are 6, 7 and 8. Neutral numbers are 3, 4 and 5. Currently we are in an OK environment with slightly higher risk. He uses fundamentals as well as Technicals when buying stocks.
The P/E Ratio is used far too much and is not a great indicator. Even with a P/E Ratio of 20 or 25, a stock could grow. There is no one indicator to say what is happening. For an example if a stock breaks below the 200 day moving average it can still change direction and move higher. It is a good indicator but by itself it does not necessarily tell you all you need to know.
On my other blog I wrote yesterday about Pason Systems Inc. (TSX-PSI, OTC-PSYTF)... learn more. Next, I will write about Next, I will write about Molson Coors Canada (TSX-TPX.B, NYSE-TAP)... learn more on Friday, November 3 around 5 pm
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