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Matthew Brooks'  Instablog

Managing Director of Diggers Fund and previously Equity Strategist at ABN AMRO Morgans, Head of Research at Australian Online Stock Market Newsletter. I've been called Australia's James O'Shaughnessy as I have back-tested quantitative equity investing strategies to see what works best in Australia.
My company:
The Super Investor
My blog:
Investment Coach
  • The Most Hated Stocks In The ASX 20 ... How Did They Perform
     On March 23 I wrote a post on The Most Hated Stocks In The ASX 20. 
     
    The article explained how investors will often be better off doing the opposite of what sell-side brokerage analysts recommend.
     
    I highlighted that the 3 stocks in the ASX Top 20 with the most sell recommendations were NAB, CBA and ANZ.
     
    The stocks with the most buy recommendations were CSL and ORG.
     
    How do you think the two groups fared? Which group made more money?
     
    Let's look at the performance of the two groups between March 23 to December 17. The comparison excludes dividends.
     
    If you had followed the analysts and bought the top buys you would have made an average of 4.6%.
     
    It's important to note that CSL was the worst performer in the ASX Top 20, and the only one whose share price fell.
     
    Your results were much better if you had invested in the top sells as the average return was 41.5%.
     
    Even the worst performer of the 3, which was the NAB, posted a gain of 34.7%, which was slightly more than the All Ordinaries.
     
    In other words, you would have beaten the market by investing in any 3 of the top sells, and underperformed significantly if you bought any of the top buys.
     
    Clearly then you may be better off doing the opposite of what the analyst's think near turning points in the stock market cycle.
     
    While acting contrary to the analysts will NOT work all the time, it's obviously a method that can work. So in early 2010 I'll highlight some more analyst buys and sells.
     
    Best Regards,
    Matthew Brooks


    Disclosure: Long ANZ, CBA
    Tags: CBAUF.PK, NABZY.PK, ANZBY.PK, CMXHY.PK, Australian Stock Market, Analyst Recommendations, Contrarian
    Dec 18 12:10 am | Link | Comment!
  • As Goes January, So Goes The Year ... does the January Barometer work in Australia?
     There are many supposed 'secrets' to investing, but in truth nearly all these strategies are widely known and you can even read about them in the paper.

    The real secret to investing is knowing which strategies actually work.

    One strategy that waxes and wanes in popularity among investors is the so called 'January Barometer' developed by the founder of the Stock Trader's Almanac, Yale Hirsch in 1972.

    What is the January Barometer? The basic idea is that the performance of the stock market in January tells you if the market will rise or fall over the year.

    If the market rises in January, it 's likely to post a positive gain over the year.

    On the other hand, if the market falls in January it's likely to end the year in the red.

    There are claims that the January Barometer works well in the U.S. and I have seen some evidence that is has a success rate of 74% since 1950.

    I have not checked whether the claims about the U.S. are true. But I am interested in whether the January Barometer works in Australia.
     
    To answer this question I looked at the performance of the All Ordinaries between January 1937 and November 2009.
     
    Taking 2009 as a complete year - which does not affect the conclusions - that's a total of 73 calendar years.
     
    Over those 73 years, 49 were positive and 24 were negative.
     
    This means the odds of the market rising in any given year are 67%, or roughly 2 years out of every 3.
     
    If the January Barometer is correct, your odds of a positive year should increase if the market rises in January.
     
    Over the last 73 years the market rose in January 51 times and of those the market ended year in positive territory 36 times.
     
    Based on these numbers, the odds of the market rising over the year if January is positive are 71%.
     
    This is an improvement, but in practice the difference between 67% and 71% is not meaningful.
     
    So what about negative years - does the January Barometer work better when the market falls in January?
     
    The answer is yes. If the All Ords falls in January, the odds of the market ending the year in the red rise to 43%.
     
    In contrast, the odds of a negative year over the entire 73 year period are 29%. So there is a big difference.
     
    There is also a big difference in the annual returns depending on the performance of the All Ords in January.
     
    • If the All Ords rises in January, the average return over the year is 10.2%
    • If the All Ords falls in January, the average return is only 1.6%.
    In short, while the January Barometer is by no means perfect there is some evidence that it works in Australia.
     
    Based on what we have seen so far, the January Barometer looks like a useful indicator ... but can this knowledge help an investor to make money.
     
    To answer this question we need to be more specific on how it could be used.
     
    One strategy based on the January Barometer would be to buy stocks at the start of January each year and to sell at the end of January if that month is negative. Otherwise you hold until the end of the calendar year.
     
    If you had invested in the All Ords using this strategy, the average rate of return, excluding dividends, between 1937 and 2009 would have been 4.9% a year.
     
    But if you just bought and hold your average return would have been 6% a year.
     
    In other words, if you are an investor you would have been better off buying and holding over the long term, and ignoring the January Barometer.
     
    Of course, the January Barometer will work in some years, when it helps you to avoid a big down year. The most recent example was 2008 when you would have sold in January with a loss of 11.3% and avoided a 43% loss over the full year.
     
    That said, it's even easier to pick a year where the January Barometer did NOT work, such as 2009 when you would have sold after a 5% loss and miss out on the near 30% rise over the full year.
     
    Overall then, the evidence suggests that investors are better off ignoring the January Barometer because it's unlikely to beat the buy and hold approach.
     
    The good news is that there are other stock market indicators that do work, and I will say more about them very soon.


    Disclosure: No Positions
    Tags: Australia, Stock Market, January Barometer, Other January Effect
    Dec 17 06:21 pm | Link | Comment!
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