Spreadbet Mag v18 Generic

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FREE ZAK
MIR AIM 2H
2013 GUIDE
Issue 18 - July 2013 The e-magazine created especially for active spread bettors and CFD traders
ALL YOUR FAVOURITE COLUMNS INCLUDING THE CHANCE TO WIN 1000 IN OUR GUESS THE FTSE MONTH END COMPETITION
PEAK GOLD -
MYTH OR
FACT?
COMMODITY
CORNER -
FOCUS ON
SILVER
TRADING SYSTEMS
& SEMINARS - A
COMPLETE WASTE
OF MONEY?
FEATURE PACKED AS EVER WITH TRADING IDEAS
Bitcoins
Just another fad
or are digital
currencies here
to stay?
Feature Contributors
2 | www.spreadbetmagazine.com | July 2013
Zak Mir is one of the UKs pioneers in modern charting methods since
the early 1990s, joining Shares Magazine as its rst Technical Analysis
Editor in 2000. Zak founded www.Zaks-TA.com, the rst pure TA
website, in 2001 and which ourishes to this day. In addition, he has
written for the Investors Chronicle, appeared on Bloomberg and CNBC
as well as being the author of 101 Charts For Trading Success.
Dominic Picarda is a Chartered Market Technician and has been
responsible for the co-ordination of the Investors Chronicles charting
coverage for four years. He is also an Associate Editor of the FT and
frequently speaks at seminars and other trading events. Dominic holds
an MSc in Economic History from the LSE & Political Science.
Robbie Burns - The Naked Trader has been a full-time trader since 2001
and has made in excess of a million pounds trading the markets. Hes
also written three editions of his book, Naked Trader and the Naked
Trader Guide to Spreadbetting and runs day seminars using live
markets to explain how he makes money. Robbie hates jargon and loves
simplicity.
Zak Mir
Dominic Picarda
Robbie Burns aka The Naked Trader
Tom founded the t1ps website in 2000 and over 12 years his average
gain per tip was 42.7% on 241 share tips. He now writes for a range of US
and UK nancial and political websites and all his content can be
accessed via www.TomWinnifrith.com - you can get alerts on everything
Tom writes by following him on Twitter @tomwinnifrith or
www.TomWinnifrith.com
Tom Winnifrith
Alpesh Patel is the author of 16 investment books, runs his own FSA
regulated asset management rm from London, formerly presented his
own show on Bloomberg TV for three years and has had over 200
columns published in the Financial Times. He provides free online
trading education on www.alpeshpatel.com
Alpesh Patel
July 2013 | www.spreadbetmagazine.com | 3
I am pleased to say that the magazine continues to grow its readership
numbers and there is an ever increasing recognition of the calibre of the
product that we put out each month and that is completely free to all
readers a pretty unique proposition in the marketplace I am sure you
will agree. Watch this space for some major news which I hope to unveil
next month as a consequence of our collective efforts and that should
enhance even further your SBM experience...
I hope you have all been making use of our new bulletin board
(www.bulletincentral.co.uk) too which is pretty unique within the
marketplace allowing you to post your own sentiment view on a stock
as well as view multiple board posts, and that shortly will also have stock
research at the side of popular companies too. As ever, its completely
free!
So, what do we have in store for you this month? We ask are all trading
systems a waste of money and the purveyors of these charlatans and
failed traders? Simple answer, largely yes! As we say in the article, if you
can trade, you dont ask people to pay you 100 a month and spend all
your time looking for new fodder, you just trade, which is far more
satisfying. We also take a look at the recent phenomena of digital
currencies, in particular Bitcoins, in asking what all the fuss is about and
whether there is room for such a product in the marketplace.
Goldbugs are well catered for once again with a piece on Peak Gold
that is both informative and thought provoking. With the yellow metal
continuing to decline in the last few weeks, yet physical demand for it
remaining at record levels, it is an interesting dynamic that is presently
at play that should, ultimately, result in a resumption of the long uptrend.
Catch up also with how the Trading Academy winner John Walsh is doing
trading and now closing his rst six months of being on his own. Im sure
many readers will relate to his emotions and experiences over this period.
The rst few years of trading on your own are the hardest and, I can safely
say that after nearly 20 years now of trading, that you never stop learning.
And so, I sign off once more and hope you enjoy the content package we
have put together for you this month. Next month its the dreaded big 40
for me and so the mag will be out a little later as I celebrate and take it a
little easy now Im no longer ofcially classed as young!
Richard
Foreword
Editorial List
EDITOR
Richard Jennings
SUB EDITOR
Simon Carter
DESIGN
www.coyotecreative.co.uk
COPYWRITER
Sebastian Greeneld
EDITORIAL CONTRIBUTORS
Tom Houggard
Thierry Laduguie
Filipe R Costa
Andrew Sillitoe

Disclaimer
Material contained within the Spreadbet
Magazine and its website is for general
information purposes only and is not
intended to be relied upon by individual
readers in making (or refraining from
making) any specic investment decision.
Spreadbet Magazine Ltd. does not
accept any liability for any loss suffered by
any user as a result of any such
decision. Please note that the prices of
shares, spreadbets and CFDs can rise and
fall sharply and you may not get back the
money you originally invested, particularly
where these investments are leveraged.
In comparing the investments
described in this publication and website,
you should bear in mind that the nature of
such investments and of the returns, risks
and charges, differ from one investment to
another. Smaller companies with a short
track record tend to be more risky than
larger, well established companies. The
investments and services mentioned in
this publication will not be
suitable for all readers.
You should assess the suitability of the
recommendations (implicit or otherwise),
investments and services mentioned in
this magazine, and the related website, to
your own circumstances. If you have any
doubts about the suitability of any
investment or service, you should take
appropriate professional advice.
The views and recommendations in this
publication are based on information from
a variety of sources. Although these are
believed to be reliable, we cannot
guarantee the accuracy or completeness
of the information herein.
As a matter of policy, Spreadbet Magazine
openly discloses that our contributors
may have interests in investments and/or
providers of services referred to in this
publication.
Welcome to this 18th edition of Spreadbet Magazine!
A helluva lot of work has gone into this publication over the last
year and a half by everyone involved our contributors (for
which I am proud to have such an esteemed line up), our design
and copywriting staff and, of course, yours truly!
Bitcoins Explained
Tom Winnifrith Conviction trade for July
8
30
The always controversial Tom Winnifrith offers up online dating group Cupid as his short
play for the next month
51
56
36
Dominic Picardas Technical Take
Our resident technician Dom has a special piece on how to beat the S&P 500 through
tactical asset allocation
41
Contents
45
Technology Corner
SBMs tech specialist Simon Carter writes a special piece on three tech goliaths and asks
what they need to do to evolve and regain their mantles
NEW Small Cap Corner
SBM unveils a brand new contributor - small cap specialist Paul Scott who kicks off
with his inaugural piece explaining his methodology for picking small cap winners
67
24
Commodity Corner - Silver in Focus
Zak Mir Interviews - Louise Cooper
Zak gets to grips with former Goldmans executive and nancial commentator Louise
Cooper
Currency Corner Duo Update
We update with our views on our major currency pair picks of the last few months -
long GBPAUD and long USDYEN
SBM makes the Buy case for the precious metal
Tom Houggards Big Call
Tom sets out his views on the major markets over the remainder of the year
SBM takes an in-depth look at the rise of
digital currencies and asks are they here to
stay?
Zak Mirs Monthly Pick
15 61
19
76
When No Trade Is The Best Trade
84
Peak Gold
88
John Walshs Trading Diary
Trading Academy winner John Walsh runs us through his experiences this
past month.
72
Alpesh On Markets
Alpesh explains the statistics behind trading for a living
92
Competition - Guess The FTSE 100 Month End
The one and only Zak Mir picks out online
video software specialist Blinkx as his trade
for July
Dont miss your chance to win 1000
Thierry Laduguie of E-yield explains his methodology in using Elliot Wave
Analysis in his trading and his proprietary sentiment indicator
80
90
Markets In Focus
A comprehensive markets round-up of under and out performers during the
month of June
School Corner
With the yellow metal remaining under
pressure we take a look at the
fundamentals and arguments
of peak gold
Are all Trading Systems a waste
of money?
In the inimitable SBM style, we take aim at the trading systems industry and ask
are they all charlatans?
FTSE Daytrader - How I started Trading
The Market Sniper Francis Hunt provides a thought provoking piece on getting at and
clearing your mind periodically when trading
How I started trading. Nick Hilsden of FTSE Daytrader reveals how we started trading
the FTSE and his experiences since then
Special Feature
BITCOINS -
A FAD OR A
NEW
ALTERNATE
CURRENCY?
A few years ago a project to create a complete new way of making
payments was developed. The idea was not new in essence, as there have
been several attempts previously to create digital currencies, but its
attempt to eliminate the need for nancial intermediation and to transfer
the control of the money supply from a single entity to each and every
user made it a revolutionary project.
Bitcoins - A fad or a new alternate currency?
Special Feature
Bitcoin, as it is named, was created to be a digital
currency and whose purpose is to take market
share from at, paper currency. At a time when the
U.S. Federal Reserve has been ever expanding its
balance sheet to record levels, printing money with
abandon and experimenting with
unconventional policy measures, it is perhaps not
surprising that free marketeers are unveiling new
methods of exchange.
Unlike with traditional paper currency, the money
supply for Bitcoin grows at a known and actually
decreasing rate until reaching a pre-determined
limit, clearly highlighting its creators concerns with
the negative effects deriving from an unrestricted
growth of the money supply. Bitcoin was created in
order to avoid ination and in line with the Austrian
School of Economics thinking.
Since its creation in 2008, the Bitcoin project has
been through several difculties and displayed a
few technical vulnerabilities, and which have been
undermining its future. While paper money suffers
from counterfeiting, digital money suffers from
hacking, and in that eld Bitcoin has been
particularly exposed. But no matter what happens
in the future, Bitcoin is a case study and a
particularly strong one at bringing into discussion
pertinent issues that have been ignored since the
gold standard was dismissed in 1971.
What Is a Bitcoin?
BITCOIN WAS CREATED IN
ORDER TO AVOID
INFLATION AND IN LINE
WITH THE AUSTRIAN
SCHOOL OF ECONOMICS
THINKING.
The monopoly power given to central banks has
been the main reason for the creation of frequently
recurring asset bubbles and for a blind redistribution
of wealth something which Bitcoin is designed to
avoid. At the same time, the attempt at eliminating
third-party intermediation and political
intervention (through taxes and managed money
supply) shows a libertarian political philosophy,
while dismissing two important agents each with
its share of blame in the current crisis nanciers
and politicians.
Bitcoin was born from a paper written by a near
fabled character called Satoshi Nakamoto, and
which was rst published to a network of
cryptographic programmers in 2008. In the paper
Nakamoto describes in detail the functioning of the
system and establishes the basis for the creation of
a new digital currency. A currency devised to
partially substitute for your dollars and pounds.
Unlike traditional currencies, instead of being
controlled by any government, Bitcoin is expected
to run on a peer-to-peer network and so in this way
being completely decentralised. The money supply
is not managed by the FED or the ECB, but rather
by its network of users who can create Bitcoins
themselves, but always at a known and
decreasing pace over the years until reaching an
absolute maximum in 2140.
Instead of having a central clearing house, Bitcoin
distributes the ledger to its network of users who,
using their computer power, are responsible for
keeping their money safe, checking for double
spending and maintaining a public register.
Transactions are free or incur very small costs.
Certainly inspired by the great nancial crisis of
2007-09 and with cost minimisation in mind in
designing the system this way, Nakamoto avoids
third-party involvement, preventing future exposure
to the unsound decisions that led to the collapse of
the nancial system in the rst place.
THE MONEY SUPPLY IS NOT
MANAGED BY THE FED OR
THE ECB, BUT RATHER BY
ITS NETWORK OF USERS
WHICH CAN CREATE
BITCOINS THEMSELVES, BUT
ALWAYS AT A KNOWN AND
DECREASING PACE OVER
THE YEARS UNTIL
REACHING AN ABSOLUTE
MAXIMUM IN 2140.
The Mysterious Satoshi
Nakamoto
Who is Satoshi Nakamoto then? The creator of the
Bitcoin world has always been a mystery right from
the very beginning. The whole project evolved from
a paper that he wrote and published to a small
network of programmers. He has also posted
several times in online forums but when someone
tries to obtain additional information about him,
results are always frustrating. No one exists with
the name Satoshi Nakamoto, at least no one who
could be the Bitcoin creator, so it is almost certainly
a pseudonym. The name suggests a Japanese
person, but as he writes in faultless English with a
British slant, many believe he may come from the
UK. At the same time, he uses an email coming
from GMX, a German free provider. The plot
thickens...
Someone suggested that in Japanese Satoshi
means wise, and someone else even speculated
that Nakamoto may be the result of a puzzle
involving the name of four companies: SAmsung,
TOSHIba, NAKAmichi, and MOTOrola. Given that
the design of the Bitcoin system as depicted in
his paper is very rened and quite complex, many
believe that Sakamoto may in fact be a group of
people instead of a single person. Other
possibilities have been advanced including
speculation that he may work for a government, a
central bank or even the CIA, but ve years after
Satoshi Nakamoto rst appeared, one thing is
clear he/she remains unknown and the mystique
grows. To add to the intrigue, near the end of 2010,
Nakamoto stopped contributing to forums and
then completely vanished without trail.
Bitcoin Trading - A 114,000%
Rise
Since its creation in 2008 and right up until 2010,
Bitcoin was nothing more than a theoretical
exercise, popular among computer geeks but with
no actual exchange value. In April 2010 the
situation changed forever as the Bitcoin actually
started trading in an exchange market. At rst it
was valued at 10 cents and stayed near that value
until October of that year. Then, as the project
became more widely known, Bitcoin gained some
traction and its value against the dollar rose to 30
cents by the end of 2010. With more and more
people willing to take a share of a rising market,
demand grew while the Bitcoin supply, exactly as
per its model that it was set up to do, experienced
a limited rise. With the FED expanding its money
supply as never before, the value of a Bitcoin rose
substantially, achieving parity against the dollar in
February 2011. With the help of articles featuring
Bitcoin on Slashdot, Forbes and other authoritative
sources, the price exploded to $8 in May, and to
$29 in June.
NO ONE EXISTS WITH THE NAME SATOSHI NAKAMOTO, AT
LEAST NO ONE WHO COULD BE THE BITCOIN CREATOR, SO
IT IS ALMOST CERTAINLY A PSEUDONYM.
SATOSHI
NAKAMOTO
WITH THE FED
EXPANDING ITS MONEY
SUPPLY AS NEVER BEFORE,
THE VALUE OF A BITCOIN
ROSE
SUBSTANTIALLY,
ACHIEVING PARITY
AGAINST THE
DOLLAR IN FEBRUARY
2011.
Special Feature
BITCOIN CHART
When the $29 price was hit, a period followed that
can be properly coined (scuse the pun!) as a
Bitcoin rush similar to the California gold rush of
the 19th century, but this time using computers and
CPU power to dig for the valuable digital metal. Of
course this also attracted the attention of
speculators looking for new opportunities; thieves,
trying to hack digital wallets; and the Feds, looking
for ways to dismantle the business as they saw it as a
potential threat.
Bitcoin actually suffered its rst stumble in value
when in 2011 it fell from near $30 in June to just
$4.60 by the year end. It then stabilised in the rst
half of 2012 and started rising again during the
second half to close the year out at $13.50. It is in the
current year however, that the value of Bitcoin
absolutely exploded, reaching more than $200 in
early February and currently trading at around $115.
Any earlier adopter would be laughing barrels of
apples after enjoying a stunning 114,900% price rise.
Two pizzas, exchanged by 10,000 Bitcoins in the
early years, would now be worth more than $1
million!
On the reverse side of the Bitcoin phenomena is
volatility. It has also been picking up exponentially,
making its price unstable and, ironically, distorting
the main function imparted upon it by its creator a
stable means of payment.
This volatility seems to be mostly related to the
elevated number of scandals surrounding it and that
have been occurring with increasing frequency with
many Bitcoin exchanges being run from unknown or
obscure places, and in certain instances being part
of criminal rings with the sole purpose being to steal
real money from people.
A Rising Crackdown on
Bitcoin
As the Bitcoin became more valuable a crackdown
began by the authorities. In 2011, someone known as
Allinvain reported that 25,000 Bitcoins, worth more
than $500 million, were stolen from his computer.
A week later Mt. Gox, the largest Bitcoin exchange,
was attacked by a hacker who drove the price of
Bitcoin to near zero and withdrew tens of thousands
of other peoples Bitcoins. The Poland-based
Bitomat, the third-largest exchange at that time,
reported it had accidentally overwritten its entire
wallet meaning it could no longer identify the
Bitcoin owners! Then MyBitcoin, the oldest
wallet service, was shut down and its owner
disappeared with everyones money. These episodes
have stressed the necessity of creating rules to
regulate the trading of Bitcoins and to allow only for
this trading on organised exchanges.
A WEEK LATER MT. GOX, THE LARGEST BITCOIN
EXCHANGE, WAS ATTACKED BY A HACKER WHO
DROVE THE PRICE OF BITCOIN TO NEAR ZERO AND
WITHDREW TENS OF THOUSANDS OF OTHER
PEOPLES BITCOINS.
Just recently, Mt. Gox, the largest Bitcoin exchange,
has been under heavy government scrutiny and the
U.S. Department of Homeland Security seized a
processing account belonging to the company. The
Department has been claiming that these service
operations lack authorisation to process money
exchanges involving the US dollar which, in
statute, require an authorisation given by the
Treasury Department and tight rules applied with
regards to money laundering matters.
It has also been speculated in the press that the
Commodity and Futures Trading Commission (CFTC)
is willing to get involved in the Bitcoin world by
regulating derivatives that are currently traded on
the digital currency. This route may open the gate
for a serious organised market in which traders could
trade without fear, but is likely to take some time
before it is implemented.
Trading Bitcoin
So how do you actually trade Bitcoins? To manage
your Bitcoins you need to download wallet
software which you can nd at the ofcial
Bitcoin website. To actually trade the Bitcoin value
you have at least two main options: using exchanges
or through spread betting.
In our view, you should avoid exchanges at all costs.
Most of them disappear from night to day and even
the largest like Mt. Gox are at odds with the Feds
and may see their assets seized at any time. In terms
of spread betting, the story is somewhat different as
you are betting on the Bitcoin price and not exactly
holding the asset. Currently we are aware of two
providers offering trading on Bitcoin: Spreadex and
IG Index.
Spreadex offers a market allowing you rolling daily
bets while IG just offers binaries on the
Bitcoin price. Spreadex allows you to go either long
or short, for a minimum stake of 50p, a spread of
2.5% and requiring a 50% margin. The margin rates
are so high due to the volatility the currency has
been experiencing and contrasts with traditional FX
pairs where margins are less than 1% and spreads
can be as low as 0.1%.
SBM is of the opinion that Bitcoin is in its early years
and in the midst of an intense ght which will end
with it either being a widely accepted, and perhaps
the worlds rst regulated digital currency, or just
marginalised into an obscure world where true
values are hard to ascertain. At this point, any
trading conducted in the instrument is, to us, more
gambling than investment and for such a purpose
you may be better off simply going into a casino.

RECOMMENDATION
SUMMARY
If there is a Gold Rush specic to the early
21st-century, the technology space has to be it. The
dot-com bubble of the early 2000s was the early
forerunner, albeit of completely manic proportions,
to what we are now witnessing in the 2010s. Many
commentators think that investors collectively are
jumping the gun once more in terms of what the
various technologies are likely to achieve.
It would appear however, certainly to me, just over a
decade after the bubble burst, that things are nally
starting to take shape in a revolutionary way. One
of the best examples in terms of AIM companies
around at the moment to take advantage of many
aspects of the online boom is Blinkx. While it may
sound like a clich, this company appears to be
doing the right thing at the right time and in fact
addressing one of the initial conundrums of the web
all those years ago: how to make money from it?
Soaring prots in the wake of the Olympics and the
US presidential election last year not only boosted
the shares, but also highlighted what the potential
for this company will be over the
medium-term.
BUY BLINKX (BLNX): TARGET 160P.
STOP LOSS 105P
Editorial Contributor
ZAK MIRS MONTHLY
PICK FOR JULY
RECENT SIGNIFICANT
NEWS
May 13th 2013 - Blinkx posted full-year results
ahead of its own $26 million guidance and
market forecasts as core earnings more than
doubled to $30.2 million. Revenue rose by 73% to
a better-than-expected $198 million. Citi upgraded
their 2013 estimates of revenue and operating
prot to $220.1 million and $33.8 million from $216.8
million and $33.7 million respectively.
April 24th 2013 - Blinkx raised its full-year outlook
as it expects adjusted EBITDA to be approximately
$26 million and revenues for the year around $196
million, ahead of the previously upgraded range.
February 11th 2013 - Blinkx said trading during the
third quarter continued to be strong, boosted by
recent acquisitions and the effects of the US
elections and London Olympics.
The company expects to be ahead of targets, with
revenue for the full year in the range of $180m to
$185m. Blinkx said that recent acquisitions have
signicantly expanded the scale and scope of the
Blinkx engine and the integrations are being
implemented extremely effectively.
FUNDAMENTAL
ARGUMENT
Of all the AIM stocks in my new 2H book, and that
includes even the giants such as Xcite Energy and
Gulf Keystone, it has to be said that it is difcult
not to have Blinkx as a personal favourite. This is
because, on the face of it, the companys business
model is relatively easy to understand. It is right at
the zeitgeist of technology at the intersection
of what most investors will be familiar with, but
which they can still be impressed by as it relates
to broadband/4G and smart phones and, perhaps
most of all, as a product that most of us might
actually enjoy using on a regular basis.
It is also a little ironic that the only blip in the recent
past has been the association with former star tech
company Autonomy from which it was spun out of,
coming on the heels of Hewlett-Packard crying foul
over its purchase of the UK knowledge
management software giant. That was, in hindsight
of course, the dip to buy into around the 60p zone
in the autumn and the shares have more than
doubled since.
As the company itself has been able to boast,
preview advertising is the fastest-growing of all the
subsectors of online advertising and therefore you
would expect a company at the heart of this to have
soaring earnings. Indeed, in May the group revealed
that annual prots were up eight fold to $17.7 million
with revenues up by nearly three
quarters to $198 million.
Perhaps a more serious concern was that there was
a chance, at least in the near-term, that the boost in
advertising associated with both the Olympics and
the US presidential election would be only a short
term boost to prots. In fact, such doubts can be
cast aside given the way that while these two key
events of 2012 attered revenue by around 10%, it
would appear to be that it is the ongoing growth of
the sector and the companys organic growth that
will power future prots onwards.
In addition, there is also the impact of recent
acquisitions to take up the slack of any post 2012
hangover. For instance, January witnessed a tie-up
with Dailymotion in order to beef up the video
offering, and further deals involving Taunton Press,
Penske Media Corp and XOS Digital. This should be
enough to ensure that the fundamental
momentum here at Blinkx remains in place, as well
as the perhaps distant possibility that at some point
soon its attractions will prove too tempting to larger
rivals such as Yahoo and Google where, even after
the substantial recent gains in the share price, the
stock still trades at a lower price to revenues ratio
than its peers, something that broker Canaccord
has been keen to point out.
TECHNICAL ANALYSIS
SNAPSHOT
What is interesting about Blinkxs chart since early
2011 is the way that you can split the daily chart right
down the middle from almost exactly a year ago.
At this point, the shares were languishing around
the 40p mark and seemed primed to deliver a fresh
leg to the downside after an autumn 2012 bull trap
through 1.60 and then a January failure just above
former 2011 summer support in the low 80s.
However, the bulls have been treated to a U-shaped
reversal centred around the early summer of 2012.
A characteristic of this rebound is that it has been
as violent on the way up, in terms of the ragged
progress we have seen, as it was on the way down.
Especially noticeable is the way that over the past
couple of months the shares shot up from below
80p to 1.40 in a near vertical fashion, an almost
mirror reversal of the case from November 2011
when the stock fell from 1.60 down to below 60p.
But, before the vertical spike seen in the spring of
this year, there was something of a journey in the
sense that the shares were determined to ush out
the bulls below the 200 day moving average then
around the 55p level during both October and
November 2012. The big buy signal there came with
a higher low above the 200 day moving
average in early December, in the wake of the scare
over Blinkxs relationship with
Autonomy/Hewlett-Packard.
I am happy to say that I spotted this as a buy signal,
even though, as is often the case, the bulletin boards
were not on side with this, at the time, seemingly
crackpot idea.
Admittedly, this was in the aftermath of a bull trap through 80p, but such signals above the 200 day line are
very often powerful ones. However, arguably one of the strongest signals in the book came after the unlled
gap to the upside in February as it was only partially closed in June and April. Such gap ll failures can lead to
spectacular rallies in stocks and markets and this was certainly the case with Blinkx.
While it has to be admitted that the rally is now somewhat long in the tooth, it does appear that there is enough
momentum remaining behind the stock to lead it up to the logical two-year resistance and one-year price
channel top of 1.60 before any signicant consolidation is seen.
Zak Mirs Monthly Pick For July
BLINKX CHART
To receive my new Zak Mir AIM 2H 2013 guide click the link on the advert before this
piece to claim your FREE copy.
Special Feature
ARE ALL TRADING
SYSTEMS A WASTE
OF MONEY?
We get asked regularly here at SBM if there is any trading system that is
really worth the money. As our more frequent readers will know, Im a
great believer in the saying Thems that can trade, do; thems that cant,
sell systems! (apologies for the Yorkshire twang slant!).
Having traded personally in the markets now for
nearly 20 years, what I can say is that I have not
come across one single, solitary paid-for system
that consistently generates prots. Sure, a
particular system may do well at a certain point in
the cycle, but the market evolves. Think how
different it is trading today under the centrally
planned QE environment on Messer Bernankes
watch relative to the late 90s on the approach to
the dotcom blow-off.
Trading conditions at any one time can be suited to a
value biased stock system, a growth orientated one,
trend following or a range/swing trading one etc. etc.
It is actually impossible for one particular system to
outperform constantly given how the conditions in a
market environment evolve. This doesnt mean it isnt
possible for a particular strategy to do well for a
period of time, however, but it does render it near
impossible to perform and generate prots all the
time.
Special Feature
MAN GROUP WEEKLY CHART
WELL, THIS IS A BILLION AND A HALF POUND
COMPANY WITH SOME OF THE BRIGHTEST BRAINS
FROM AROUND THE GLOBE WORKING ON THEIR
QUANTS DESK TRYING TO FIGURE OUT HOW TO
OUTPERFORM THE MARKET.
Lets look at one particular popular type of
strategy the trend following one. Take a glance
at the share price of Man Group below. Not pretty
reading. The reason for this fall? Well, this is a
billion and a half pound company with some of the
brightest brains from around the globe working on
their quants desk trying to gure out how to
outperform the market. No prizes for guessing that
for the last 3 years they have not been able to.
Think about that for a moment prize winning PHDs
with all the computing capability in the world at their
nger tips have not been able to nd a consistent
holy grail to generate consistent returns. They did
exceptionally well from 2003-08, but in recent years
their agship AHL Diversied fund, from which they
rely on for the generation of a good proportion of
their protability, has not been able to produce decent
positive returns or get back above its high watermark
(the level above which it can start charging
performance fees).
Are all trading systems a waste of money?
If Man Group cannot create an all-terrain system to
beat the markets, what chance do you think Mr
Ginn from SystemsRus ogging his signals for a
few quid each month has? My primary question to
many of these vendors over the months that I have
been running this magazine is simply If your system
is so good, why do you not trade it?! I wont bore
you with the no end of excuses that have come back,
from Why would I not leverage my prots through
selling the signals? to Id like to give something
back to the investing community. Purrlease... It is
extremely simple if you can make money trading
the markets, you trade them. You accept that there
will be drawdowns, that some trades will go right
and some will go wrong. But over the long haul you
trade and you prot. What you dont do is send out
shoddy emails to mass email lists offering to deliver
them to the sunny uplands for 50, 100 or
whatever it is per month!
Heres a couple of reasons why a trend following
system will inevitably fail: rstly, when it gets you
into the trend, likely a good proportion of the gains
have been had. When a stock, index or currency
changes they generally do so violently, and quickly,
and so the trend following system will, inevitably,
get you in at a point where a retracement is due.
Secondly, there is the problem as to where to place
ones stop too close and youll be taken out, and
too far away and you risk giving back a lot of your
prots. Ive seen countless occasions where there is
in fact a steady uptrend in place, but the magnitude
of a snap back (long or short) is around 10-20%. How
many trend following systems would have remained
in there with such a volatile move? This actually is
one of the inherent difculties of any trading what
is the price move that prompts you to cut and run
and/or do you remain with your conviction if such a
dislocation occurs?
What I also know is that those really successful
investors and traders do not hide behind
hypothetical results disclaimers. If you see such a
disclaimer then double delete the email! The simple
fact is, as our esteemed contributor Tom Houggard
relayed two editions ago in relation to the worth of
so called trading seminars, pretty much all the
trading systems out there are really technical
analysis based signal generators. With a good
charting package you can likely generate your own
trading signals algorithm, and when you back test it
I dare say that it would be protable on paper. Hey,
you could even go out and then look to charge
people for this!
So, if 99.9% of systems are a waste of money and
what is taught at seminars you can learn from a lot of
free material out there on the net including our own
Trading Guides page, then how do you outperform
the market I hear you ask? The answer is simple
there is no guarantee with any fund manager, or
indeed if you stick to your own strategy, and at
certain points in the market cycle you will
underperform. But, if you put in the time in doing
both the required fundamental and technical analysis
I dont think either can be used exclusively
position size correctly, and apply relatively basic
money management principles re maximum
give-backs that you are prepared to endure, youll
have half a chance the more experienced you
become and, best of all, youll save yourself hundreds
if not thousands of pounds on seminars and all
singing and dancing paid-for systems!!
The other alternate of course is to nd a good fund
manager and accept that there will be periods of
underperformance. In fact, given that most managers
specialise in particular asset classes/sectors, this is an
inevitability as that particular area be out of favour at
a point in time. I have found over the years that asset
allocating into undervalued areas AND, in the case of
stocks, choosing the best companies in that area and
holding through the cycle, is the only way that gives
you the best odds of not only
outperforming but generating a positive return over
the medium term. If you think about it, and in looking
at the market cycle below which is based on how
human nature works, this should actually work as you
buy assets at a low point and look to sell at a high (or
higher) point.
WHAT I ALSO KNOW
IS THAT THOSE REALLY
SUCCESSFUL
INVESTORS AND
TRADERS DO NOT HIDE
BEHIND
HYPOTHETICAL
RESULTS
DISCLAIMERS.
Special Feature
These cycles generally take three to four years to play out, although, with all the QE recently, this has stretched
and distorted the cycle. We are busy hoovering-up undervalued mining assets at present at Titan and, if youd like
to join us investing our OWN money and where we only get paid if we perform, click the image below to register
your interest to invest in our rst three funds.
MARKET CYCLES CHART
Commodity Corner
COMMODITY
CORNER -
SILVER FOCUS
BY BEN TURNEY
TIME TO GO
ALL IN?
Silver focus Time to go all in?
Commodity Corner
Making money in markets should be one of the easiest paths to
riches around. Buy in bull markets, sell in bear markets and retire
early to your own private island. In the words of Sergey the
Meerkat, Simples! The reality, of course, is somewhat different.
Even identifying the market you should be in can be fraught with
difculty.
For many investors in silver this lesson is likely to
have been extremely painful in the last two years.
To many, the bull market in precious metals, which
started in November 2008, should not have broken
as it has in recent months. Ination should have
rocketed, as the worlds central banks engage in
a continuing race to the bottom with each others
currencies whilst simultaneously engaging in an
unprecedented expansion of the monetary base.
Societys faith in at money should have been
shattered and there should have been a much more
widespread transfer of wealth into physical assets
(specically gold and silver).
Instead, we have experienced a savage bear
market and the price of silver has in fact fallen
55% from its April 2011 record close of $48.37/oz.
What were quite well grounded bullish expectations
have been completely confounded, with many likely
nursing sizeable losses.
There is still a lot of confusion as to why this has all
happened.
Following a price decline of 55%, it is safe to say this
is one of silvers more severe retracements in recent
years. However, as I will explain below, I think the
precious metal is on the cusp of a new leg up.
What I personally use is something called the
MIDAS Method. Developed by Paul Levine in the
mid-Nineties, the MIDAS Method plots price against
On Balance Volume (OBV).
The MIDAS Charts differ from standard charts as
the length of each month is determined by the
OBV gure. This is immediately is more useful as
higher volume months stand out from lower
volume months, giving an impression of the
strength of the trend. Within the charts, Paul
Levine developed an algorithm to calculate support
and resistance lines to help traders and investors
determine relatively low risk entry points based on
the prevailing direction of the market. Above all,
MIDAS users seek charts with strong historical
conformance, and silver has been a particularly
good example of this.
To the right is the 10-year MIDAS Chart for silver.
Note that there are two levels of support, JUN2003
(pink) and NOV2008 (purple). The interaction of
the price of silver with these two support levels over
the last ve years helps explain a great deal about
the situation this market now nds itself in.
The Nov 2008 support line clearly acted as
primary support during silvers last bull market. It
originated in NOV2008, just below the JUN2003
support line (which I will come back to), and was
validated three times within the rst 16 months of
silvers initial recovery. Each of these proved to be
excellent trading opportunities, the last one in
particular. Thereafter the Nov 2008 support was
tested twice more (in December 2011 and between
June and July 2012) and again these were superb
entry points (all trading points are circled in red).
More recently, in early April this year, the price of
silver again stopped at NOV2008 support.
However, this time it quickly broke and plummeted
25% in just over a month (marked in blue on the
diagram). According to the MIDAS Method, such
a sharp decline at any support level invalidates the
support line. Once a support line becomes invalid,
then this is the signal that the market trend it has
been supporting is over.
SOCIETYS FAITH IN FIAT
MONEY SHOULD HAVE
BEEN SHATTERED AND
THERE SHOULD HAVE
BEEN A MUCH MORE
WIDESPREAD TRANSFER
OF WEALTH INTO
PHYSICAL ASSETS
(SPECIFICALLY GOLD AND
SILVER).
Silver focus Time to go all in?
For precious metal investors, the loss of NOV2008 in April this year marks a clear watershed, but what happened
next is intriguing to say the least... The price of silver fell almost exactly back to the JUN2003 support and has
since held this level (circled in red below).
10 YEAR MIDAS CHART FOR SILVER
10 YEAR MIDAS CHART FOR SILVER
Commodity Corner
ONE OF THE FASCINATING ASPECTS OF THE MIDAS
METHOD IS HOW PRICES CAN BEHAVE AT LONG-TERM,
CRITICAL LEVELS OF SUPPORT AND RESISTANCE.
SILVER PROVIDES A PERFECT CASE IN POINT AT THE
MOMENT.
Coincidence? Perhaps, but there are plenty of people out there who want to believe in the random walk. This is
ne if it works for them, but the evidence that price movements conform to historical patterns is surely
overwhelming.
One of the fascinating aspects of the MIDAS Method is how prices can behave at long-term, critical levels of
support and resistance. Silver provides a perfect case in point at the moment. The chart below is a six month,
daily standard chart of silver.
6 MONTH SILVER CHART
Silver focus Time to go all in
Since April 26th silver has made a series of lower
highs and higher lows. This symmetrical triangle
pattern (drawn on the chart) is a widely recognised
indicator for a directionless market. It is easy to
spot and strongly suggests that neither the bulls
nor bears are winning the tussle for dominance. On
its own, a symmetrical triangle is usually not a good
indicator for buying or selling.
Unsurprisingly, symmetrical triangles can often
occur at potential market tops and market
bottoms. I say potential because the pattern
reects the markets indecision. Just because a
symmetrical triangle occurs, this doesnt
necessarily mean a reversal of the trend will follow
however.
UNSURPRISINGLY
SYMMETRICAL
TRIANGLES CAN OFTEN
OCCUR AT POTENTIAL
MARKET TOPS AND
MARKET BOTTOMS. I SAY
POTENTIAL BECAUSE
THE PATTERN REFLECTS
THE MARKETS
INDECISION.
That said, if you have a particular view that a tide
is about to turn, then a symmetrical
triangle can be one key indicator to watch out for.
The fact that silvers current symmetrical triangle
is occurring at MIDASs Jun 2003 support looks
highly signicant to me.
If the price breaks lower from here, the next likely
level of support is probably at around $19/oz (which
served as resistance from November 2009 to
August 2010). However, if silver is consolidating
and is about to start a new upwards trajectory, this
could be an ideal entry point to take on a leveraged,
tightly managed long position. The previous
conrmation of JUN2003 support in November
2008, at the start of the last major bull market, and
the halt of silvers recent collapse at this level both
add weight to the case for buying.
Symmetrical triangles cannot last forever. The
market will soon have to make its mind up and our
moneys on a fresh up-leg that will take us back
towards $30 before the year is out.
DOMINIC
PICARDAS
TECHNICAL
TAKE SPECIAL
Dominic Picarda is a
Chartered Market Technician
and has been responsible for
the co-ordination of the
Investors Chronicles
charting coverage for four
years. He is also an Associate
Editor of the FT and
frequently speaks at
seminars and other trading
events. Dominic holds an
MSc in Economic History
from the LSE & Political
Science.
You cant beat the stock market over time
the textbooks are adamant about that. And, if
you bother trying, youll just end up with lower
returns and rack up higher costs to boot.
Real life seems to back this theory up: some ninety percent of
professional money-managers fail to beat the S&P 500 index over
a ten-year horizon. The solution: give up trying to outsmart the
market, buy a low-cost tracker fund and sit on it.
Since youre reading this magazine, you almost certainly disagree
strongly with the previous paragraph. As a spread bettor, you
believe you can do better than the average, and are willing to put
your hard earned money where your mouth is. And despite what
a lot of the theory claims, there is hard evidence that it is possible
to do better than buy-and-hold, whether youre investing tactically
or swing-trading.
You might think that beating the S&P 500 index would demand
access to the worlds nest research or intensive trading. In fact, a
simple and totally objective trend-following approach is all thats
needed. And, this doesnt require you to be constantly buying and
selling either. On average, the market-beating strategy in
question would have involved less than one trade per year over
time.
HOW TO BEAT
THE S&P500
THROUGH
TACTICAL
ASSET
ALLOCATION
S&P 500 INDEX CHART
YOU MIGHT THINK THAT BEATING THE S&P 500 INDEX
WOULD DEMAND ACCESS TO THE WORLDS FINEST
RESEARCH OR INTENSIVE TRADING. IN FACT, THOUGH,
A SIMPLE AND TOTALLY OBJECTIVE TREND-FOLLOWING
APPROACH IS ALL THATS NEEDED.

HOW TO BEAT
THE S&P500
THROUGH
TACTICAL
ASSET
ALLOCATION
S&P 500 HISTORIC CHART
So, how does it work? The idea is simple: catch as
much of bull markets as possible and dodge the
worst of big bear markets. Most people rely on a
combination of fundamental valuation and
gut-feeling to determine the outlook. My alternative
is to follow the trend, buying when the market rst
makes an end-of-month close above its 10-month
exponential moving average, and selling when it
does the opposite.
To ensure you get in as early as possible during a
new uptrend, this approach also goes long when
the S&Ps monthly relative strength index turns up
from below 30 per cent, which is an extremely
oversold reading. And, to make sure that ones
money isnt idle when the system is out of the
market, all cash should be invested in short-term
government securities or instant-access savings
accounts during those periods.

The results of this system are strikingly good over
time. Going all the way back to 1871, the S&P has
returned 6.5% a year after ination and assuming
the reinvestment of dividends. Tactically
switching in and out of stocks and risk-free
Treasury Bills would have earned 7.6% a year, by
contrast. That single percentage point may not
sound like much, but it makes an enormous
difference to a portfolio over time.
Not only has this approach earned a higher return,
but it has done so by taking less risk. The annual
volatility from buying and holding the S&P 500
has been around 18.7%. The volatility of the tactical
switching strategy was only 15.8%. This goes against
everything the textbooks tell us about earning
higher returns. In order to get more bang for your
buck, the academics say you have to take on more
risks, not fewer.

THAT SINGLE PERCENTAGE POINT MAY NOT SOUND
LIKE MUCH, BUT IT MAKES AN ENORMOUS DIFFERENCE
TO A PORTFOLIO OVER TIME.
TACTICAL SWITCHING V BUY AND HOLD METHOD

Still, this isnt to say this strategy is a free lunch. It
requires patience and discipline. Just over half of all
its trades over time have lost money. Occasionally,
there have been as many as ve losers on the trot. In
terms of annual performance, the strategy has only
outperformed buy-and-hold in around one-third of
all years. All these things can make it quite
psychologically difcult to stick to this approach.

How best to put a tactical switching strategy such
as this into practice? Given that the average trade
lasts ten months, and that reinvested dividends are
an important part of the strategy, the most obvious
way would be to buy an exchange-traded fund or
other tracking product. Doing it within an Individual
Savings Account (ISA) or Sipp would mean that you
wouldnt have to worry about capital gains tax bills
as you sold each time.
For pure spread betting purposes, Ive found a
short-term trading strategy using similar principles
that would have achieved decent results. Buying the
S&P 500 the day after it crosses above its 91-day
EMA and then selling the day after it crosses below
its 64-day EMA would have produced 1292 points
of prot since 1993, compared to 1164 points by
buying and holding. And, although it produced
only 35 winning trades versus 51 losers, the
reward-to-risk ratio was 4.39.
Those of a trading mindset could therefore use the
tactical switching strategy as an alternative to
buy-and-hold for their longer-term investment
account, while also doing the daily version in their
spread betting account.
STILL, THIS ISNT TO SAY THIS STRATEGY IS A FREE
LUNCH. IT REQUIRES PATIENCE AND DISCIPLINE. JUST
OVER HALF OF ALL ITS TRADES OVER TIME HAVE LOST
MONEY.
Technology Corner
HOW DO
YOU SOLVE A
PROBLEM LIKE
MOTOROLA?
Simon Carter investigates how the sleeping tech
giants of yesteryear can reawaken their fortunes and
why Yahoo might be an unlikely source of inspiration.
BY SIMON CARTER
We never had this problem twenty years ago, the
question of whether it was right to feel nostalgic for
big old tech companies. Back then, there were no
big old tech companies, there were just shiny new
ones, changing our lives with fancy gadgets,
eventually convincing us to throw away our
Filofaxes and trust our lives to microchips.
But now, in the cold light of 2013, its possible to get
a warm glow simply by casting the mind towards
the day you rst received an AOL CD-ROM and
dialled up to the internet for the very rst time. Or
the moment you rst icked open your Motorola V3
to the envy of all around. Hell, its even possible to
get that itchy ache of nostalgia from the memory of
your rst game of Wii Tennis on Nintendos wildly
popular console. It was like magic. It was all magic.
But magic fades.
Three former market leaders: AOL, Motorola and
Nintendo (and make no mistake about it, they were
giants) are on the verge of falling off the mountain
their success built and into a pit of obscurity, and
many within the industry say the time is now for
these companies to decide whether they want to be
another Sega, or whether they want to be another
Apple. Or even another Yahoo.
Whilst the riches to rags story of the Sega
Corporation and the rags to riches to rags back to
riches story of Apple are both well documented, the
current mini renaissance that is happening at Yahoo,
under the sometimes controversial but possibly
visionary hand of Marissa Mayer, could be the
guiding light that our three (not so wise) friends are
looking for.
MARISSA MAYER
How Do You Solve a Problem Like Motorola?
THREE FORMER
MARKET LEADERS:
AOL, MOTOROLA AND
NINTENDO (AND MAKE
NO MISTAKE ABOUT IT,
THEY WERE GIANTS)
ARE ON THE VERGE
OF FALLING OFF THE
MOUNTAIN THEIR
SUCCESS BUILT AND
INTO A PIT OF
OBSCURITY.
MARISSA MAYER
Special Feature
Though only in her role for a relatively short time
span, Mayer has overseen the acquisition of more
than 10 companies (the most noteworthy being the
$1.1bn purchase of social blogging website Tumblr).
Not all of the acquisitions are headline news:
Ghostbird Software, Rondee, Stamped and Jybe
may all be new names to most people but, in the
words of Mayer, each procurement align[s] well
overall with our businesses. In short, Yahoo are in
the process of reinventing themselves from an
also-ran search engine to a web portal / hub to
give users the all in one experience that AOL used
to provide. Respectively, the companies listed above
were: an iOS photo app, a conference calling
provider, an app for nding recommended social
activities and a service to nd and recommend
places to eat. This is clever shopping from Yahoo.
But, there is more to Mayers plan than shopping for
services and products that will strengthen Yahoo.
Part of the reason for picking up so many
companies so quickly is to capture the creative and
technical skills behind them. Indeed, one of Mayers
rst moves was to ban working from home. The idea
was initially ridiculed and derided as a policy from a
bygone age, but who can fail to be excited by the
culture dish of talent being created at Yahoo HQ?
How does this help the likes of AOL, Motorola and
Nintendo though? After all, if Yahoo are snifng out
and acquiring the cream of technological talent,
not to mention Google and Facebook hoovering up
every promising graduate they can lay their hands
on, whats left for them? Just how can they ght
against the dying of the light?
Despite rebranding itself recently as an online video
advertising provider, and enjoying its rst quarterly
growth in eight years, AOL are still struggling not
to fade away in the world of web. In fact, search
online for AOL and youre more likely to nd puff
pieces about the three million dial-up customers
still scratching around America than anything in the
way of relevance. Acquisitions have not gone well
for AOL in the past, think the Bebo disaster, so they
should concentrate on what they are good at. Even
though they have been, in the past, criticised for
their walled garden approach to the internet, the
fact that they still have so many loyal dial-up
customers shows that this is something desirable to
many people. If AOL were to create a similar
offering in broadband, then they would have
millions of potential customers to aid in the switch
from dial-up to broadband as well as tempting back
some of the 25 million subscribers who have
deserted them over the years.
Think this is a backward move? Consider that the
revenue AOL receive from internet still dwarfs the
revenue they receive from all other services
combined.
So how about Motorola? Throughout the 1990s and
the middle part of the last decade, the Illinois based
company were never out of the top three selling
mobile phones.
Well its not so much what Yahoo are doing that
should provide inspiration, its why they are doing
it. Forget the specics of the shopping spree for a
moment and youll see that Mayer has given in and
realised that going toe-to-toe with Google and
Microsoft in the search wars is never going to end
well. She also knows theres no benet to throwing
a huge hat into social networking. So, Yahoo are
thinking about what users want from the web, and
are doing everything they can to provide that
experience. This is where AOL can learn.
WHAT DO CANDY CRUSH, ANGRY BIRDS, CUT THE
ROPE AND FRUIT NINJA ALL HAVE IN COMMON? THEY
ARE ALL HUGELY POPULAR MOBILE GAMES BASED ON
A VERY SIMPLE IDEA.
Now, they offer only three handsets after splitting
the once successful company into two divisions
following losses of $4.3 billion between 2007 and
2009. Following the Yahoo model of acquisition is
impossible (even Apple buy hardware from
Samsung) so if Motorola want to be big in mobile
again they need to focus on what they were always
good at: design. The RAZR V3 was the iPhone of
2004 it was so fashionable that Paris Hilton even
had a jewel-encrusted V3 and with Apple coming
under re for a lack of innovation, the iron could
be hot for Motorola. The software is taken care of,
Motorolas now run on Android, so instead of tiny
design upgrades (see the minor tweaks that
differentiate the new RAZR with the RAZR HD) the
rumoured new X Phone had better be beautiful.
And what of Nintendo, the legendary gaming
giant who are withering under attack from
Microsoft and Sony in the console wars and the
huge threat of mobile gaming? Always the kings
of innovation, the Japanese company rocked the
world in 2006 when they launched the Wii. Millions
were sold, it seemed that every home had one, and
then it stopped. The Wii U, launched last year, has
certainly not caught re, and with prots on the
slide (or gone completely), times are tough in
Tokyo.
Do Nintendo once again have the next big thing up
their sleeve? The Wii U and DS 3D would suggest
not. So, what to do?
What do Candy Crush, Angry Birds, Cut the Rope
and Fruit Ninja all have in common? They are all
hugely popular mobile games based on a very
simple idea. Basically, they are Nintendos Tetris
updated for the 21st Century. In a market where a
tiny start up (or sometimes, just one person) can
become huge with one light bulb moment,
Nintendo could do worse than put signicant
efforts and resources into the smartphone gaming
market. Following Yahoos method of acquisitions,
a few smart purchases could see the Nintendo logo
lighting up every iPhone and Samsung Galaxy
across the world. Forget consoles, Nintendo. Let
others build the devices, you make the games.
Of course, if it were that easy to turn companies
around Marissa Mayer wouldnt be on $23.4 million
a year at Yahoo, but with a few tactical tweaks it
really is possible for the sleeping tech giants of
yesterday to wake up.
How Do You Solve a Problem Like Motorola?
Can you prot from your predictions?
Capital Spreads is a trading name of London Capital Group Ltd (LCG), which is authorised and regulated by the Financial Conduct Authority.
Apply today at CapitalSpreads.com,
great value for Spread Betting and CFDs.
Spread betting carries a high level of risk to your capital and can result in losses that exceed
your initial deposit. This advert should not be construed as investment advice.
a) Run to the pawn shop whilst that
wedding ring still has some value
b) Agree the gold boom is over
and sell gold
Gold looks like it
may be on the slide,
do you:
TOM WINNIFRITHS
CONVICTION
TRADE OF THE
MONTH
SELL CUPID AT 75P
Once again I go into battle with my old friend the great
(if semi-literate) chartist Zak Mir. He reckons that AIM
listed online dating agency Cupid is a buy and is
heading for 94p. I reckon that it is largely worthless and
is heading to c10p a share or less. I suppose that it all
depends on timescale. As Keynes noted, in the long run
we are all dead. With Cupid it is just a matter of how
long the long run is.
Can you prot from your predictions?
Capital Spreads is a trading name of London Capital Group Ltd (LCG), which is authorised and regulated by the Financial Conduct Authority.
Apply today at CapitalSpreads.com,
great value for Spread Betting and CFDs.
Spread betting carries a high level of risk to your capital and can result in losses that exceed
your initial deposit. This advert should not be construed as investment advice.
a) Run to the pawn shop whilst that
wedding ring still has some value
b) Agree the gold boom is over
and sell gold
Gold looks like it
may be on the slide,
do you:
The shares have certainly sprinted ahead in recent
weeks which is odd as Cupid ended May with a
pretty dramatic prots warning. The reason for the
re-rating could be that folks are terried of betting
against Zak. Or, more plausibly, it is that a fund called
Toscafund has been aggressively buying stock it
now owns 11% of Cupid.
There are some folks out there who reckon that if a
fund is buying that aggressively it has to be a strong
signal to follow. Hmmm... Toscafund specialises in
buying large stakes in stocks that have tanked as
recovery plays. And it is an activist investor. But it is
not infallible. I note, for instance, that it bought out
Healthcare Locums at just 0.75p a share earlier this
year. That may or may not turn out to be a bargain.
But Toscafund had, less than 12 months beforehand,
essentially underwritten a large rescue funding at
10p a share. You see we all get it wrong now and
again and I think that on Cupid, Tosca it has got it
badly wrong.
The fundamental aw with Cupid is, I believe, that
its business model does not work. It runs a variety
of websites which are largely not for those seeking
romance, love, stable long term relationships and a
wife to berate you, but for those seeking a
no-strings bunk up casual sex. Oddly enough
most of its customers are men. The reason for this is
that if you are a woman seeking random encounters
you are unlikely to spend money putting your photo
or any details on the internet in most cultures we
still apply different standards to how we view men
and women who put out. Men are macho studs.
Women are sluts.
If you are a good-looking woman seeking random
no strings encounters you could either pop along
and see me at my restaurant or, if I am busy, there
are numerous bars where your needs can be sated.
That is how most folks get casual sex (dont ask me
how I know!). If you are determined to stick your
photo on the internet, use a free site (an advertising
driven model) where there is a critical mass of
punters wanting the same thing.
So why the heck sign up with Cupid? Indeed. And
hence that means that most Cupid customers are
men. And it seems that most are very disappointed
by what they get for their cash.
The average Cupid customer lasts for less than 3.5
months (and falling). Now, given that Cupid
persuades customers to sign up for either one
month, three months (a far cheaper option) or a
year, one wonders what the actual renewal
percentage is? Oddly in a company that gives out
KPIs (management speak Key Performance
Indicators) ad nauseam this is one KPI that is not
given out to investors. But my money is on the
renewal rate being de minimis.
There have been allegations that Cupid has lured
punters (i.e. desperate men) into signing up by
showering them with fake emails from gorgeous
young women with an apparently insatiable lust for
carnal pleasures with men any man will do as long
as he can breathe. Cupid denies this and promises
an independent review of the allegations by June
30th. Oddly enough, it appears that this review
had not as of a couple of weeks ago involved
speaking to the undercover reporter in the Ukraine
who claimed to have been offered a job by Cupid
pretending to be one such woman. So while the
review can hardly be viewed as credible, no doubt
Cupid has nothing to hide and has done nothing
wrong... But, ahem, research undertaken by an as-
sociate made it clear that while he was pondering
taking up a Cupid membership (he did not), he was
indeed swamped with birds who seemed to want to
copulate with him. No doubt this is all a coincidence.
But the point is that whatever the expectations of
customers of Cupid, the dire renewal patterns
indicate that those expectations are just not being
met. With no specic reference to Cupid at all, but
in a general sense, if your customers think your
service is crap, you have a fundamental problem.
There are only two ways around this. One is to spend
vast amounts on marketing so that you always have
fresh meat for the mincer. And the other is as a
quoted company to use your equity to buy other
businesses meaning that your poor organic
metrics can be masked with bought in growth.
Oddly enough Cupid spends a vast amount on
marketing and has also used its (once highly rated)
paper to make a number of acquisitions.
THE REASON FOR THE
RE-RATING COULD BE THAT
FOLKS ARE TERRIFIED OF
BETTING AGAINST ZAK.
OR, MORE PLAUSIBLY, IT
IS THAT A FUND CALLED
TOSCAFUND HAS BEEN
AGGRESSIVELY BUYING
STOCK IT NOW OWNS
11% OF CUPID.
But in the end, the wheels will always come off a
business that is not satisfying the needs of its
customers. And that brings me to the most recent
RNS statements. I refer to three. There was a March
25th trading statement, a May 29th prots warning
and a June 4th RNS prompted by an article wot I
wrote.
To June 4th rst. I had run my proposed copy past
Cupid and published. Cupid then responded with
an RNS which said that my article was misleading
blah, blah, blah, but demonstrated this by correcting
things that I had not said at all. So while I discussed
cash minus trade payables on July 3rd 2013, the
company discussed cash on June 30th in its RNS.
In other words, Cupid inferred via an RNS that I had
stated things that I patently had not. That is not the
action of a company that I would
personally be backing.
On March 25th Cupid stated that sales growth so far
in 2013 was more than 20% and that it was on track
to hit forecasts. Analysts thus expected H1 EBITDA
of c6.5 million (up from 5.9 million).
Step forward to May 29th and we were told that
sales growth in H1 would be 13% but on a LFL
basis (excluding acquisitions) that was MINUS 1%
and that EBITDA would be 2.5 million.
Clearly in Q2 sales growth from the acquisitions
has slowed big time and from core businesses sales
must be falling fast. Given my comments above
about renewal rates and meat for the mincer that is
not good at all.
What kills businesses in the end is cash or lack of it.
Cupid says that by June 30th it will have cash of at
least 10 million and no debt. But it is likely to have
net trade payables of at least 3.5 million, its
dividend is payable on July 2nd which is 2.5
million and there is a deferred consideration due in
July of 1.4 million. If your metrics are falling off a
cliff, a cash position (minus net trade payables) of
2.6 million is not a good place to be.
Cupid is my conviction sell of the month at 75p.
CUPID CHART
PAUL
SCOTTS
SMALL CAP
CORNER
This month we introduce a new contributor. A chap with a name in the small
cap arena, built up over a number of years and with a large following. Paul
Scott.
He has been a professional small caps investor since 2002. He trained as a chartered accountant in the early 90s,
then spent eight years as the Head of Finance for a rapidly growing ladieswear retail chain (we grew from 16 to
150 shops).
Paul says: In 2002, I gave up wage slavery for good, and concentrated my efforts full time on small caps
investing. Overall Ive made a very good living from the markets in the last 11 years, and continue to do so.
Although I dont want to gloss over the fact that I had a pretty rough patch in 2007-8, as indeed did many other
people and companies. So, a lot of important lessons have been learned along the way, sometimes the hard way!
He writes a weekday column on small caps at Stockopedia.
Why focus on small caps?
Generally Ive found far more pricing anomalies
amongst small caps than in mid to large caps. Also
there are a number of features of the small caps
market which are inherently attractive to investors,
such as:
1. Little to no analyst coverage, so bargains can
remain undiscovered and unpublicised for a good
while.
2. Most institutions cannot invest below a certain
threshold, e.g. sub 100m market cap, as such
investments would be immaterial and hence
pointless to a large fund, so we private investors
have the eld, in many cases, to ourselves.
3. Small cap companies and their accounts are
usually not overly complex and thus easy to
understand.
4. Access to Directors is easier, by attending AGMs,
telephoning companies and getting straight through
to CEOs and FDs, etc.
5. Illiquidity in the shares can lead to large and
irrational price movements, which creates many
good buying (and selling) opportunities.
6. If you catch a good growth company early, the
rewards can be spectacularly good.
Set against that, one also has to consider that small
caps are inherently more risky because they tend to
be more heavily reliant on a few customers and a
few products/services so the chance of something
going wrong is greater.
BEAR IN MIND THAT EVERYONE IS TALKING
THEIR OWN BOOK, AND BE SCEPTICAL! IT
IS ALWAYS VITAL TO DYOR. OVER TIME YOU
LEARN WHO THE GENUINE PEOPLE ARE, AND
WHO ARE NOT.
How to nd stock ideas?
Ive found that there is no substitute for putting in
the time and effort to nd under-priced shares.
My main methods of nding bargain shares are:
1. Getting up at 7 a.m. Mon-Fri and reading RNS
statements results and trading statements. This
will give you the most up-to-date picture of how
companies are performing, and the early bird will
quite often catch the worm Ive made some
excellent prots from diving in at 7:58 a.m. and
grabbing shares in a small cap that has just
announced a positive trading statement or results.
However, you really do have to know what youre
doing to get it right.
2. Meeting management again this involves time
and effort, but greatly increases your
understanding of a company. I probably meet the
management of 30-40 companies per year, and the
odd one will turn out to be a very successful
investment. It also sometimes helps you avoid bad
situations!
3. Networking sharing ideas with other
investors can be valuable, interesting, and fun.
Bulletin boards, Twitter and face-to-face meetings
with like-minded investors are great ways to swap
your best share ideas. Bear in mind that everyone is
talking their own book, and be sceptical! It is always
vital to DYOR. Over time you learn who the genuine
people are, and who are not.
4. Stock screening I use Stockopedia to lter the
market for shares with attractive valuation
metrics, such as a low PER, a good dividend yield
and a sound balance sheet. This is a great way of
producing a manageable shortlist of shares to
research, and to nd new opportunities.
5. Magazines/Internet Its worth having a quick
skim of magazines such as Shares, MoneyWeek and
Investors Chronicle, which occasionally throw up
some interesting companies. [Editor intetrject
and of course SBM!]
My stock picking approach
Its difcult to explain exactly how I pick shares, as I
dont use a set formula. However, it goes something
like this:
1. Eliminate certain sectors one person cant
cover the entire market, and different approaches
and knowledge are needed for some sectors so I just
ignore sectors where I have no competitive edge or
experience, or are too risky. For me, this rules out
certain sectors such as the resources sector,
aviation and nancials (banks, insurance cos, etc).
Im a believer in Warren Buffetts key rule only
invest in what you understand.
2. Eliminate micro caps personally I set the cut-off
point at about 10m market cap. Below that level,
liquidity can become non-existent, and the risk of
a de-listing is high (which usually means an instant
50%+ loss when its announced).
3. Eliminate companies with weak balance sheets
my golden rule is to avoid 100% losses from
companies going bust. This is achieved by a fairly
quick review of the balance sheet, taken in context
with the P&L and cashow statements. If there is
even a slim risk of a company going bust, I deploy
my bargepole.
4. Conduct desktop due diligence on the companys
accounts, its most recent annual report (I read the
whole thing, but focus mainly on the gures and all
the notes to the accounts, less so on the marketing
blurb at the front!). I also do a Google search on the
company, review its own website and review
bulletin boards for the company (tip the quieter,
the better, as that means other investors havent
spotted the value!).
This all takes time and hard work. Lots of share ideas
are abandoned at some stage of the above process,
but a few survive to a point where they stand out as
being a bargain.
Paul Scotts Small Cap Corner
What is a bargain share?
Well, thats the key question! It will vary from one
investor to another, but for me it is obvious when I
nd a bargain. After crunching all the gures, Ill
literally get a warm tingle about having found
something that simply looks too cheap given the
companys likely performance in the next year or
two. It will look cheap based on even gloomy
assessments of their future performance, and the
upside will be thrown in for free.
Historic nancial performance only tells half the
picture. When we buy shares, we are effectively
placing a bet on the company performing better
than the market has factored into the current share
price. Broker notes can help in this regard, but their
forecasts are often wildly inaccurate because it is
difcult to forecast prots given that prot is the
sliver that is left after unknown sales, partially known
gross margins and largely known costs are netted
off. Hence small variations in sales can trigger large
variations in prot due to operational gearing.
So one of the key things I look for is an up-to-date
positive trading statement. It will sometimes take
the market several days, or even weeks, to digest
a trading statement and its impact on protability.
You can get a real advantage as an investor by
already understanding the company well and being
able to quickly and accurately interpret their latest
trading statement.
A recent example of this was Pilat Media (PGB). I
agged up how cheap the shares were in my
Stockopedia morning report on 16 April 2013, when
the shares were 37p. At the time Pilat held net cash
of almost half its own market cap and had recently
announced excellent annual results, and a strong
outlook. Adjusted for net cash and amortisation, the
earnings multiple was only around ve or six. It was,
in my opinion, just the wrong price! So, obviously I
bought some stock myself, as well as agging it to
my readers for their own research, and weve made
a tidy 52% gain already in just two months.
Finding situations like that wont happen every day
of course, but its surprising how often they do crop
up. Usually you have to be more patient though, as
an irrationally low (or high) price can continue for
long periods sometimes. However, for the
patient investor, a fundamentally good company
generating decent and sustainable cashows and
priced cheaply relative to the rest of the market
should eventually re-rate upwards.
Avoiding investing fads
Every bull market produces a wave of traders who
make good money by chasing up fashionable shares
to increasingly irrationally exuberant levels. These
are often loss-making story stocks.
Such bubbles are as old as the nancial markets
themselves and there are some excellent books
which remind us that human nature (and hence the
markets) does not actually change even though
technology does such as the absolute classic
Reminiscences of a Stock Operator or A Short
History of Financial Euphoria by Galbraith.
Personally I dont completely rule out riding a
speculative wave providing you keep your eye very
closely on the exit, and treat it for what it is
essentially gambling. The big danger is when you
become a believer in a hyped up share and refuse to
sell once the bubble has burst. Ive been there and
done it, hence having learned the hard way to be
very careful or completely avoid story stocks.
However, if a story stock is priced reasonably and
has adequate nancing to continue for the next
couple of years, then it might be worth considering.
My favourite story stock at the moment, in which I
hold a small position, is Clean Air Power (CAP). It has
a product already in production, namely equipment
which allows diesel-engined HGVs to run largely on
natural gas. If sales really shoot up, as they possibly
might, then the 14m market cap could rise to
multiples of that. Or it might not; its a bit of a punt.
So, on a risk/reward basis in my view there is a, say,
10% chance of hitting a seriously big multi-bagger
with that share, a 30% chance of getting a
doubling or tripling share price, a 40% chance of it
staying about the same for a few years as they try to
commercialise it, and a say 20% chance of it
opping in the next year or two.
Totting that up, at 14m market cap I think the
chances of me making a prot on the shares at their
current 8p are reasonably good. But, looking at
another company in the same sector, take Torotrak
(TRK), which has been trying to commercialise its
revolutionary gearboxes for many years, and not
really getting terribly far in terms of nancial results,
their 46m market cap looks a lousy risk/reward
balance to me, so I am avoiding those.
So, generally I will look at story stocks if they are
cheap and the risk/reward looks good. However,
these will only ever be a small side line in my
portfolio of good solid companies on a cheap
multiple of future cashows.
Over-looked and unloved
shares
This is where the real bargains can be found, and
it is my favourite hunting ground. Value shares that
everyone hates, and assumes are awful, can
occasionally provide spectacularly good
investments. However, they can also be
dangerous value traps too I was nearly caught on
Game Group a while ago, but exited at a prot when
it began to emerge that suppliers were stopping
supplies fatal for any business. So its not easy.
My biggest winner last year was Trinity Mirror (TNI),
which I wrote about in detail on my blog when the
shares had crashed to only 25p. This put the
company, amazingly, on a PER of just one! Yes, one!
How could this be? It was partly because the
company had considerable net debt, although I
worked out that the net debt would be fully repaid
from cashows in about three years.
It was also because the market assumed
newspapers would quickly die out, whereas in
reality Trinity Mirror is still producing a remarkably
high operating prot margin, and is matching falling
sales with reducing costs.
Finally, their pension decit, whilst large, was fully
covered by freehold property. So arguably the two
simply net off.
The shares are now more than four times the price
than when I wrote about them this time last year. I
sold too early, but more than doubled my money on
them and so I was happy. Again, it all boiled down to
a lot of hard work researching the numbers in great
depth, going to the AGM and, above all, being
prepared to take a contrarian stance on a share
which it seemed everyone deemed to be a
catastrophe. In fact, it was an outstanding bargain
at 25p, as I discovered and publicised at the time.
TRINITY MIRROR CHART
What do I like currently?
Its more difcult to nd bargains right now, given
that weve had a strongly rising market in the last
year, so Im taking a cautious approach at the
moment. However, shares which I believe to be
under-valued and unloved include:
Norcros (NXR) at 15.5p on an irrationally low
forward PER of about 7.5 and paying a reasonable
3% dividend yield. Pension decit seems under
control and does not worry me unduly.
New River Retail (NRR) at 222p a very interesting
secondary retail property REIT which is yielding 8%
and has good long-term upside on its NAV from
development work. I met management recently
and am highly impressed with their experience and
strategy.
Clean Air Power (CAP) at 8p as mentioned above,
this is a speculative pick, but everyone likes a little
bit of fun in their portfolio alongside the more
sensible stuff!
NB. Please be aware that these are ABSOLUTELY
NOT tips or recommendations, they are simply
shares that I personally like and personally hold in
all three cases. So please, as always, do your own
research and take professional advice where
appropriate.
Small Cap Fund
I hope the above gives you a avour for my
stock-picking approach. I dont claim to be a guru,
but over the years Ive got a lot more share ideas
right than wrong. I was recently asked by Titan
Investment Partners if I would like to help them set
up a small caps fund using an innovative spread
betting wrapper.
Weve been working together to set up a structure
that manages the risk in a conservative way, and
I shall be seeding the Fund with my own money.
Therefore its a project that Im both excited about
and committed to. I will be the main stock picker for
the Fund, operating within a strict set of rules that
we believe will minimise risk and maximise returns,
including limits on gearing adopting a
counter-cyclical approach to the use of it (our
model portfolio is currently not using any gearing at
all, but is 42% in cash!).
I will give more details of the Fund next month and
shortly our inaugural rst month performance
gures!
To register your interest in our Titan Small Cap
Fund email smallcap to : info@titanip.co.uk
Paul Scotts Small Cap Corner
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SPreadBetting mag_A4.indd 1 19/06/2013 10:22
BIG CALL
Last night I gave in to peer pressure and reluctantly plumped
my posterior down into a comfortable sofa for a couple of
hours of easy viewing of a Hollywood blockbuster which was
interrupted every 15 minutes by ve minutes of adverts. How
annoying! I dont have a TV myself. I nd it a waste of time,
but every now and then I can digest a good movie.
TOM HOUGGARDS
One advert however kept coming up. A company
called confused.com which was essentially
offering their cost comparison services on anything
between heaven and earth! I thought to myself why
dont we have a confused.com for stock market
forecasting? I would subscribe!
I am as the advert states confused.com. And
yet, day after day I am supposedly surrounded by
experts. Hell, I am supposed to be an expert myself!
I subscribe to expert newsletters, but it seems they
are confused too. Elliott Wave analysts proclaiming
bull markets and bear markets in the same
instrument how is that even possible?
My training says that I should trade what I see. So
what do I see? Well, I see a bull market in equities. I
think the Dow Jones is going to hit 16200 within the
next four months. The problem with that little neat
forecast is that it only takes one Fed chairman to
utter something about QE3, QE4EVA or whatever
QE they are now on, and my forecast goes out of
the window... The forecast itself goes against my
cyclical view of market behaviour too you
shouldnt have strong rallies in equities during the
summer months. The chart however suggests
otherwise.
TO ME, OIL IS ONCE MORE IN A BULL MARKET. I
LOOK AT THE CHART AND I THINK IT HAS
$180-200 WRITTEN ALL OVER IT.
To me, oil is once more in a bull market. I look at the
chart and I think it has $180-200 written all over it.
I dont know how it would get there. Perhaps Syria,
Iran, Russia? We chartists dont worry too much
about the fundamental picture, quite simply just is it
going to get there. I dont even know how long it will
take for it to get there but still, thats what I see and
so I am trading what I see.
Onto the Eurodollar pair which looks like it wants to
drop to $1.15. I am currently building a short position
here and I intend to add to my shorts every couple of
hundred points that it moves in my favour. This way I
ensure I only add to a winning position as opposed to
losing ones that many rookie traders do. When
technical levels are hit along the way I will close the
add-on positions but keep the core position which I
hope to establish with an average around $1.35.
DOW JONES CHART
The commodity of the moment gold looks
like the Lehman Brothers chart unless it can regain
$1550. I read forecasts of gold up at $2000 and also
of gold at $800. This is a tough call, but my
moneys on the short side whilst the technicals still
stink. Remember, I zone out the fundamentals and
trade purely what I see...
The big unknown is interest rates. The central banks
can set short term interest rates, but the market can
price long term yields themselves, or they could
until QE starting meddling with things.
You have a nation of retirees who are getting nothing
for their savings. We are in a world where money
managers are forced to search for yields and this
explains rising equity prices. However, I detect signs
of the market beginning to overwhelm the QE buying
with yields the world over rising quite sharply in recent
months. This is a big trend to watch.
Tom Houggards Big Call
EURODOLLAR CHART
10 YEAR BOND YIELD CHART
Bottom line is that the politicians hold the fate of many markets in their hands. I am thinking of buying a TV, just
so I can keep an eye on what those ECB and FED guys are talking about, but I will hold off for the time being and
just trade what I see not what I think. It has worked well so far for me.
Tom
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A SPECIAL DUO
- DOLLARYEN
AND STERLING
OZ REVISITED
One thing that makes us different here at SBM is that, aside from being
largely written by real bona de traders who actually get in there in
the market with their own capital and so understand other traders (as
opposed to nancial journalists that frankly largely couldnt trade their
way out of a paper bag), we only write about a
subject/company/sector that we really believe in be it bullish or
bearish.
Currency Corner Update
CURRENCY CORNER UPDATE
Our two primary currency calls over the last six months have been long dollaryen and long GBPAUD.
Dollaryen was covered in the November 2012 edition (SBM 10) of our magazine (page 79) in which we
suggested getting long this pair. Below is a chart of how this call performed over the last seven months. Its
fair to say it was one of our best calls, as was our continued bullish overtures towards the Japanese equity
market just before the market took off by nearly 100%. Question is, with the pair recently nosing over 100
and touching a high of around 103.5, where next for dollaryen?
Top 3 oil picks for 2013 A special duo Dollaryen and Sterlingoz revisited
DOLLAR YEN CHART
Well, another of our mantras here at this
publication is that if we are unsure about
something, then it is best to simply do nothing.
Unnecessary trading activity is another direct route
to the poor house that we have seen with many
traders over the years... For those readers that did
follow our lead in this pair, at the current rate just
shy of 99 (at time of writing) our suggestion is to
take the money to the prot bank and move on.
WELL, ANOTHER OF OUR MANTRAS HERE AT THIS
PUBLICATION IS THAT IF WE ARE UNSURE ABOUT
SOMETHING, THEN IT IS BEST TO SIMPLY DO NOTHING.
UNNECESSARY TRADING ACTIVITY IS ANOTHER DIRECT
ROUTE TO THE POOR HOUSE THAT WE HAVE SEEN WITH
MANY TRADERS OVER THE YEARS...
Short term there could be more downside back to
the 94 level and at that level it would be tempting
to get long once again when looking at the weekly
chart below. The 94 level is where the 19 and 38
exponential weekly moving averages are centred
and we can see on the 20 year chart that these
have proven to be exceptional trend directives
over multi-year periods, i.e. when the pair has risen
above both averages and the averages are rising,
the trend persists for a number of years (and vice
versa to the downside).
DOLLARYEN WEEKLY CHART
HOWEVER, IN TAKING A LOOK AT THE CHART BELOW,
WE CAN SEE THAT THE PAIR IS THE MOST OVERBOUGHT
IT HAS BEEN FOR SOME YEARS NOW THE WEEKLY RSI
READING IS OVER 70 TYPICALLY A MEASURE THAT
CAN, AT THE VERY LEAST, PRESAGE A PAUSE AND, QUITE
OFTEN, EXHAUSTION OF THE INITIAL THRUST.
Currency Corner Update
The chart also shows just how overbought the pair
had become in recent weeks, with the RSI the most
overbought it has been for over 20 years (touching
almost 90 in fact a very rare occurrence). With
the sharp shakedown the pair has seen in recent
weeks taking the RSI back towards the early 60s,
the excessive over-bought-ness is now steadily
being unwound.
A natural target should the pair come back to the
mid 90s would then be an extension of the up move
to around 108-110. A good stop level if going long
again would be a weekly close back below 91 a
good risk/reward ratio of three big gures
downside vs 14-16 big gures upside. However, as
we relayed in the prior paragraph, at current levels,
given the cracking prots achieved, theres no need
to be a hero and hang around. Exit and wait for the
next move is our stance.
Moving on to GBPAUD, and this has also been a
sterling call of ours (scuse the pun once more!).
We recommended that readers look to get long
on the pair around the $1.51 with a target of $1.75
by year end in our February edition (page 76). At
the time of writing the pair is trading around $1.65
and so this has also delivered exceptional prots
to those that have remained with the trend. This
was in fact one of our high conviction trades, so
dislocated had the value of the pound become vs
the Aussie, and we remain of the belief that there
is more to come here by the year end. However, in
taking a look at the chart below, we can see that the
pair is the most overbought it has been for some
years now the weekly RSI reading is over 70
typically a measure that can, at the very least,
presage a pause and, quite often, exhaustion of the
initial thrust.
GBPAUD CHART
I would not be surprised, as with USDYEN, to see
this pair retrace some of its 20 big gure gains back
towards the late 1.50s and remain there for several
weeks whilst the short term overbought situation
is shaken off. The move from 1.45 to the highs just
shy of 1.67 (at time of writing) is typical of a reversal
from a long term bottom. Violent thrusts are seen
that stretch the RSI as the short positioning and
trend following systems capitulate in stages and
then the Johnny come latelys jump on board after
a decisive move.
As ever, the market looks to bamboozle this with
a counter trend move, and only when they are
ushed out can the move continue.
Any move in the pair back towards 1.55 - 1.57 site
of our favourite exponential moving averages (the
19 and 38 week) would be our cue to get long
again, particularly when married with an RSI in the
mid 50s.
Top 3 oil picks for 2013 A special duo Dollaryen and Sterlingoz revisited
Special Feature
PEAK
GOLD
MYTH
OR
FACT?
Special Feature
CENTRAL BANKS HOLD GOLD BECAUSE IT IS A
GUARANTEE AGAINST A NATIONS OBLIGATIONS
AND ISSUED CURRENCY.
Theres no doubt that central banks traditionally
owned gold as reserves similar to holding
foreign currencies but it would be naive to think
they hold the yellow metal just because it is
tradition. What leads the FED to hold around $366
billion in gold, the Bundesbank around $152
billion and the top 10 central banks around the
globe more than $1 trillion is certainly something
more than pure tradition. There is a solid economic
rationale behind it.
Central banks hold gold because it is a
guarantee against a nations obligations and issued
currency. People hold gold because it is a
protection against ination, a protection against
at currency and perhaps the only real true means
of universal exchange. Paper currency has no
value other than the legal recourse given to it by
the backing government. If that government is bust
(like Zimbabwe was in the mid-noughties and
certain Latin American countries regularly are)
then the saying It isnt worth the paper its written
on takes on a whole new meaning. Fiat
currency is controlled by a central bank or
government which may change its value as it
wishes, particularly where the currency is free
oating. Gold in contrast isnt controlled by any
one single central source (not even JP Morgan!),
but rather is subject to universal supply and
demand rules, and without carrying a ag or
having any national allegiance.
Unlike what many people think actually, paper
currency isnt really wealth. Wealth is measured
by the hard assets we own and currency is just a
means of obtaining those assets. Paper currency
is valuable in terms of its purchasing power only,
but it may drastically change from one period to
another, particularly if governments allow ination
to take hold. Because gold is rare, resistant, has a
stable supply and isnt manipulated (over the long
haul anyway!) by anyone, it is innitely better as a
reserve currency than the worlds only true current
reserve currency the US dollar.
Even though gold is now seen as a commodity,
throughout the 19th and 20th centuries it was a
real currency as the major economies including the
US & Britain subscribed to the gold standard. While
the US dollar, the British pound and the French
franc circulated as the ofcial means of exchange
in their own countries, the yellow metal was behind
each of them in order to give them the credibility
and the assurance demanded by those parties
taking the legal tender as currency. During that
period anyone wishing to exchange US dollars for
gold could do so at a predetermined rate.
The gold standard guaranteed a period of low
ination as we touched upon in the last edition of
our magazine, quite simply because central banks
werent able to print money as they so desired.
Central banks own gold because its
tradition said Ben Bernanke
infamously at one of his regular
appearances at Congress when
grilled by the pugnacious senator
Barney Frank. Gold isnt money
its an asset as treasury securities are
[and it is often demanded] as a
protection against tail risk,
Helicopter Ben testied. But it
seems that many of us quite simply
dont believe him and prefer to hold
gold as opposed to paper currency;
essentially as if it were money.
BEN BERNANKE
Top 3 oil picks for 2013 Peak Gold Myth or Fact?
They would need to actually have enough gold
reserves before expanding their domestic money
supply otherwise people would perceive gold as
more valuable than the ofcial rate seemed to
indicate and no prizes for guessing how they
would act yes, a rational person would exchange
his currency for gold anticipating a rise in its
value. This would effectively led to a reduction of
the money supply and thus frustrate the initial
attempt to expand it. The gold standard enforced a
prudent tight monetary policy and so sound
money.
But, say Mr Bernanke and his ilk, why spend $20
when we could spend $20,000 by printing money?
Thats right! The cost of printing money is relatively
low and by putting the printers at work we can
nance wars, the welfare state and become really
rich! If only it were that simple...
In recent years they have gone one step further
and central banks have played a complicit game of
helping the government raise money through the
issuance (in the USs case) of treasury bills and the
central bank then buys them with freshly minted
notes to keep yields acceptably low. That is a great
plan! Until the chickens come home to roost,
usually in the form of late stage ination.
During the American Civil War and World War I, the
US government put the full convertibility between
the dollar and gold on pause in order to be able to
print money to nance the war bill.
In 1971, the standard was nally abandoned and off
course; this came at a cost - ination. Ination that
took around 10 years to really ravage the US
economy and that required Paul Volcker to jack up
interest rates aggressively to tame it. Something
that those investors prepared to receive 2% on US
bond yields presently should reect back on and
dust off their economic history books.
Whilst the US ination rate averaged 1.36% during
the gold standard era, it has since averaged 4.36%
during the period from 1971 until today. It doesnt
sound much of a difference, but when
compounded over 40 years it is a phenomenal
knock to the purchasing power of a dollar note.
Gold prices exploded after being stable for more
than 100 years. During the last 41 years, gold prices
have risen by 3725%, a huge amount and almost
triple the returns from equities and where prices
rose 467% over the same period.
When adjusting for ination, an investment in gold
yielded 575% during the period while the S&P 500
yielded 146%.
THE GOLD STANDARD ENFORCED A PRUDENT
TIGHT MONETARY POLICY AND SO SOUND
MONEY.

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I NV E S T ME NT PAR T NE R S
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invest capital where you are prepared to accept a high level of risk to its security. Margin calls may be
made at some point in the future and should you be unable to meet the margin call then you may be
forced to crystallise a loss at that point. *Spread betting in the UK is currently tax free but this may change
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allowable for either income or capital gains tax.
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THE ADJUSTMENT WILL, IN ACCORDANCE WITH
ELEMENTARY ECONOMICS, HAVE TO BE MADE
THROUGH A SUBSTANTIAL PRICE INCREASE.

With at currency being printed aggressively,
demand for gold will only likely increase as people
nally cotton on in a wider sense just how much
their currency is being debased. With the gold
supply not expected to rise substantially and with
the current pull back in the price likely to result in
even less supply over the next two to three years as
mine plans get mothballed, the adjustment will, in
accordance with elementary economics, have to
be made through a substantial price increase.
During the last few decades, there have been no
major gold discoveries. Gold has become rarer and
rarer and, in a little known statistic, only 1 in 6,300
gold projects effectively go into production. It is
also becoming harder to nd, the ore-grades are
declining and production costs continue to
increase. In 1993, total exploration costs
amounted to $1.2 billion and 55 million ounces of
gold were produced. Ten years later, in 2003,
exploration costs rose to $1.5 billion while gold
produced shrank to 25 million. In 2010, exploration
costs were out of control amounting to $5.7 billion
and production still shrunk to just 20 million. With
those supply side stats it doesnt take a genius to
work out what will happen to the price again...
To us here at SBM, with the gold price now down
nearly 30% from its peak, sentiment very
depressed, actual net shorts in the gold futures
arena and yet physical demand reaching new
records, the fundamentals to buy gold and gold
mining companies have never been better than
they are today. In the case of the gold miners, you
can buy assets trading at less than $10 EV/reserves
in a variety of global jurisdictions, price to cash ow
multiples of under two times and discounts to book
value of almost 80% it is like being a kiddie in the
sweet shop, so attractive are the bargains.
What with currency devaluations, declining gold
supply and rising national debts, the only currency
with a proven value store historically and in the
future will be gold. Gold reserves in the US amount
to $366 billion with gold valued at $1,400 per
ounce, while government debt is shortly to surpass
$17 trillion and the currency circulating amounts to
$1.2 trillion. Thats something to think about for the
longer term.
If youd like to invest with our sister company
Titan in our precious metals fund then visit
www.titanip.co.uk and register your interest.
S&P 18 YEAR CHART
Top 3 oil picks for 2013 Peak Gold Myth or Fact?
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SPM-IPAD_Layout 1 11/06/2013 15:52 Page 1
ZAK MIR
INTERVIEWS
FINANCIAL
MEDIA
COMMENTATOR
LOUISE COOPER
ZM: Welcome to the SBM grilling Louise! Lets
get straight down to business: Recession,
Depression, or the New Normal, where are we in the
economic cycle?
LC: I think we are actually recovering in the UK.
In fact, I have just written a piece entitled The UK
Economy Has Just Reached A Turning Point, Unless
It Has Already Turned! Predicting the actual
inection point of an economy is always incredibly
difcult, no one gets it right. Famously Lord
Lamont, the then Chancellor in 1991, got it right, but
he got slammed for his green shoots by the
media and the electorate who were still feeling
recessionary pain. This is because most of the
commentary and analysis at the time of the
inection point is still very negative.
ZM: So that is great, Norman Lamont called the
greatest 15 year boom in history?
LC: The point I would make from that is whether
that was just guesswork or skill? Still, he said it at
the right time and virtually nobody ever does.
ZM: But rather than Sinatra singing Norman
Lamont, we have the stock market as a guide with
the general rule being that it is normally 12-18 months
ahead of a recovery. That is why we have had the
FTSE 100 hitting multi year highs.
THE OUTGOING BANK
OF ENGLAND GOVERNOR
MERVYN KING HAS BEEN
HIS MOST OPTIMISTIC
REGARDING THE
ECONOMY IN SEVEN
YEARS WE HAVE
INCREASED GDP AND
REDUCED INFLATION.
Louise Cooper is a qualied Chartered Financial Analyst (CFA). She started her career
in 1992 at Goldman Sachs in London as an equity research salesperson advising fund
managers on their portfolios. After that she moved on to become a business and
nancial broadcast journalist, mostly on air with the BBC World Service. More recently
she was a markets analyst at BGC Partners and has now set up her own blogging
business at coopercity.co.uk. She regularly appears in the media commenting on the
nancial events of the day.
LC: The outgoing Bank of England Governor
Mervyn King has been his most optimistic
regarding the economy in seven years we have
increased GDP and reduced ination. He has not
spoken so condently since the start of the crisis. If
you look at the book This Time Is Different, normally
peak to trough GDP in a nancial crisis is two years.
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SPM-IPAD_Layout 1 11/06/2013 15:52 Page 1
ZM: But if you ask small companies, they will tell
you that they still have a Credit Crunch!
LC: Yes, but If you look at the Great Depression in
the U.S., credit contracted for years and for
everyone. We have not had that magnitude of a
contraction.
ZM: So everything has been done right?
LC: No, not everything, but the banks had to be
bailed out. My concern is that they have not been
bailed out enough and that the UK still does not
have a strong banking industry. In fact, what they
have done is reduce competition in an already
uncompetitive industry. Politicians love to do this
kind of thing, but it just creates a mess like the
Co-Op issue we are seeing now. So what happens is
that strong banks take over the weak, and the weak
pull down the strong.
ZM: But the result of the intervention is that we
have had a rip-off situation for the consumer for ve
years: base rates at 0.5% and mortgages of 4% APR,
it is a joke. You have the bonuses and the scandals
to boot.
LC: There was no choice; the economy would have
gone to hell if they had not bailed out the banks.
ZM: So there was no way of allowing say Alliance
& Leicester to go bust, compensating depositors
and ending the story that way.
LC: It is not the depositors that worry me. It is the
credit in the economy.
ZM: But how can you be sure that we are not in a
Japan situation where we just see false dawn
followed by false dawn for 20 years?
LC: The thing about Japan is that they did not
do very much on the QE front for years, and also
they allowed deation to take hold. Japanese asset
bubbles in property and equities were signicantly
worse. For instance, it was said that Japanese stocks
on a 100 p/e was quite normal at the time. Madness!
It is also a relatively closed economy they dont
hire women, it protects its industries etc. So no, I
dont think we are Japan.
In a normal recession it is less than a year. But, for
a true comparison to our current one it is better to
look at the 1929 Depression as this crisis was a
global one and then the peak to trough period then
was four years. The UK had its peak Q1 in 2008 and
so, in fact, this is proving to be a longer lived crisis
than even then.
There was also no triple dip back in this recession,
it actually being a double dip and in contrast to all
the newspaper headlines that have been shouting
doom and gloom. That was actually wrong
ZM: What would / should be the catalyst for
proper economic growth, not just the dancing
around the at line we are still seeing GDP gures
margin of error notwithstanding?
LC: A more condent consumer. As well as this,
businesses have not spent cash for years, they are
hoarding cash, but as soon as they get any sign that
things are improving there is going to be a
stampede to spend. The reason why prot margins
are so high is simply because they have not been
spending.
ZM: Does this mean that the macro strategy has
been correct to get us where we are now bailing
out the banks / QE / interest rates down to zero?
Or are we in fact here despite the intervention, not
because of it? Isnt it the case that without all the
misguided Keynsian meddling we could have been
where we are now three years ago, i.e. on the cusp
of recovery?
LC: I disagree with that absolutely. The banks had
to be bailed out, and more capital still has to be put
into them.
ZM: Was that to save depositors or the credibility
of the banking sector?
LC: It was to save the economy, to avoid a Credit
Crunch.
ZM: But we had a Credit Crunch.
LC: We had a proper Credit Crunch post Lehman
Brothers but central bankers reacted quickly.
Without this the fall out would have been much
worse.
Zak Mir Interviews - Louise Cooper
ZM: Are we going to break the cycle of boom
and bust?
LC: No, not at all!
ZM: What about gold as a hedge against the bad
times?
LC: I nd gold odd as an investment, with
paper gold via ETFs even more peculiar given that
one of the attractions of the metal is that there is a
xed amount of it which is why it is preferable to
paper currencies. There is not enough gold around
to back the ETFs and that is a potential scandal
waiting to happen. Even more intriguing is the way
that the gold of most countries does not lie in the
countries it belongs to. Basically, in my opinion, you
would only buy gold if you thought the world was
going to hell, which I dont think it is.
ZM: Moving onto your career in the City, you have
worked at the Vampire Squid Goldman Sachs
and other leading houses. Has the City changed
in a positive way since you started 20 years ago?
Have the increasing regulations improved it and the
internet delivered a level playing eld for private
investors? Is there a positive message, or is it the
same slimy place it always was?
LC: I didnt think that Goldman Sachs was slimy; I
thought and still think it is a high quality outt.
ZM: Even though it doesnt have a great image
as far as the ordinary person in the street?
I FIND THAT VERY ODD,
COMPARED TO OTHER
STILL VERY DIRTY PLACES
IN THE CITY. OVER THE
YEARS I THINK PROFITS
HAVE CORRUPTED, A
LITTLE LIKE WITH
PROFESSIONAL
FOOTBALL PLAYERS.
LC: I nd that very odd, compared to other still
very dirty places in the City. Over the years I think
prots have corrupted, a little like with professional
football players. When I started, it was a lucrative
profession, but not indecently so. I think the
Credit Bubble meant it became an insanely
protable place for individuals and that corrupted
a lot of morality in the City. This was combined with
bad regulation the regulator lacks the abilities
and resources to do the job properly, in my opinion.
ZM: But isnt the real problem that it is the idea
of regulating itself which is a joke? It is just a bad
idea, it would be best to have nothing at all and just
rely on the Civil Courts.
LC: I think you need regulation. But the light
touch regulation approach was a joke, especially in
the middle of a Credit Bubble. All of a sudden
traders were given millions to play around with
because money was so cheap.
ZM: Because the markets change so quickly and
because it is such a complex area regulation is
always going to be one step behind, is that what
you are saying?
ZM: So shouldnt we have just building societies
and hedge funds?!
LC: Building societies are dangerous too, just look
at Nationwides balance sheet: 8bn of
regulatory capital and 154bn of loans to customers.
How many of those loans need to go bust to wipe
out the 8bn?
ZM: If building societies and gold do not appeal,
where would you put your money?
LC: That is the problem because ination is highly
tempting for indebted Governments and acts as an
invisible tax that people do not know they are
experiencing. With ination at 4-5% and 0.5% on
deposit, savers are getting hit with the Cypriot
savings tax without realising it. My own fear is
ination and that there will be a tolerance of
ination to deate the decit, and I think that is
going to be everywhere. Equities are a partial
ination hedge and perhaps the best choice given
the alternatives of bonds and, say, London real
estate which is already in a bubble.
ZM: You have been in the City for a long time
now, what is the next move for Louise Cooper?
LC: I have my CooperCity blog. I think that some
of the quality of the analysis out there for the
retail investor is not high. Clearly, my background is
advising the professional institutional investor and
thanks to my journalism background I think I have
the ability to explain highly complicated subjects in
an understandable, professional way. I also love my
independence and I can say what I think because I
work for myself.
LC: What the regulators need to do is hire really
smart people. If you look at the wage scales at the
FSA you will realise that is not going to happen. If
you are going to have a regulator you are going to
need well informed, smart, well paid people.
ZM: Yes, but those people want to work in the
City; they dont want to work for a regulator.
LC: Not necessarily, but you need to pay people
well, and in fact you need to pay for information, like
the SEC does in the U.S. If a company gets ned as
a result of the information you provided to the SEC,
you get a percentage of the ne. Brilliant! By
whistle blowing here you likely destroy your career
and therefore there has to be an incentive. Why
bother?
ZM: At the moment we appear to have too much
of the wrong regulation and not enough of the
right type.
LC: I agree with that. To me the complexity within
the current banking regulation with the distinction
between casino and investment banking and
retail banking is wrong. Retail banking is actually
more dangerous, it can bring a bank down. A
property bubble will bring a bank down far quicker
than a bunch of derivatives traders.
ZM: At what point in the economic cycle is
banking a decent business? They seemingly never
lend at the bottom and they lend too much at the
top.
LC: If you look at banking p/e ratios they have only
ever traded on sub market ratings. When I joined the
City they were on p/es of 8 to 10 when the market
was on 15. They also dont trade on much of a
premium to asset value as the stock market does not
regard the earnings as being of sustainable quality.
WITH INFLATION AT 4-5% AND 0.5% ON DEPOSIT,
SAVERS ARE GETTING HIT WITH THE CYPRIOT SAVINGS
TAX WITHOUT REALISING IT.
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PATEL ON
MARKETS
As I write this for SBM readers, I am presently in Luxembourg
speaking on where to invest now for the Rothschild Private Bank.
And, in the face of all the anecdotal evidence with
regards to the number of successful traders (90%
blow up rate within a year where leverage is
concerned, particularly in the futures arena is an
accepted, if shocking, gure!), I am hearing from a
lot of people that they want to take up trading full
time. So, let me give you some advice...
If you need 30,000 per annum to live on, and think
you are nearly as good as Warren Buffett and so
should make 20% per annum in prots, then you
need to have 150,000 cash to trade with. Well
ignore tax for now. Of course, some years you will
not make 20% and you will have to go a whole year
without food and water.
To make life easier you may try to achieve 10% on
300,000. But most dont have 300,000
speculative money hanging around.
Then we come back to the 90% of private
investors who lose money trading the markets. Still,
you reckon you are in the top 10%.
Next comes time. How are you going to generate
that return? You could spend every second trading.
Maybe 10 trades a day. Maybe they cost you 10
each. Thats 100 in commissions or other costs. That
is 500 a week, or 2000 per month, or 24,000 a
year. So now you need actually to make not 20% on
150,000, but actually closer to 40% on 150,000.
Or, you may say that you want to reduce those costs
by trading less frequently, but still look to make 15%
say. This is more realistic. You would look to pick a
basket of stocks expecting a 15% rise over 12 months.
That seems to put less strain on your time and
limited skills and experience.
Alpesh Patel
Alpesh Patel is the author of 16 investment
books, runs his own FSA regulated asset
management rm from London, formerly
presented his own show on Bloomberg TV
for three years and has had over 200
columns published in the Financial Times.
Patel On Markets
But how many stocks? Which ones? The number
should be manageable. So lets say 15. Any fewer,
and if one does poorly, it will have a heavy impact
on your whole portfolio. Any more, and if one does
very well, it wont have enough of a positive
impact. Of course they should not all be in the same
sector, or even geographical region, otherwise its
really one stock disguised as 15...
But which ones? What moves? What does
undervalued mean and where do you nd it? Online
websites? Magazines? The pub? You can start with
magazines like this one. Look for the reasoning of
the commentator.
Stories told by stock commentators can be
seductive and attractive and alluring about
prospects of discovery. Remember not to be greedy
and lured into such fantasies. Go for solid analysis,
not hope. Learn what price-earnings ratios are and
why they are important.
Do all of the above, aim with a portfolio of 15 stocks
aiming for 15% (once they hit your target decide
whether another 15% is likely over another year) and
if they drop 25% sell them no matter what excuses,
and you might, just might, get out alive.
But what when you dont have that kind of capital
and need greater returns? This is why spread betting
is popular. You use leverage, based on a notional sum,
and trade more frequently and avoid tax (you hear
G8 tax dodging spread betters!). But know, that
more leverage, less time, for more return equals more
risk. Do not kid yourself. Just know the numbers.
If all else fails then look for a managed service with
a good investment thesis and returns record and let
the professionals do the job for you. I for one will be
intrigued to see how www.titanip.co.uk performs over
the next year and that, uniquely, uses a spread
betting wrapper to attempt to generate tax free
returns.
Alpesh Patel
www.alpeshpatel.com
TO MAKE LIFE EASIER YOU MAY TRY TO
ACHIEVE 10% ON 300,000. BUT MOST DONT
HAVE 300,000 SPECULATIVE MONEY HANGING
AROUND. THEN WE COME BACK TO THE 90% OF
PRIVATE INVESTORS WHO LOSE MONEY TRADING
THE MARKETS. STILL, YOU RECKON YOU ARE IN THE
TOP 10%.
PATEL ON
MARKETS
School Corner
USING ELLIOT WAVE THEORY
IN TRADING
BY THIERRY LADUGUIE OF E-YIELD
I have been using Elliott wave analysis for years to forecast the stock
market. I remember the rst time I came across Elliott wave analysis was in
1997, after reading a book called Technical Analysis of the Futures
Markets. As I began to count the waves, I quickly became a devoted Elliott
wave analyst.
SCHOOL
CORNER
The signals that work for me are triggered when
my sentiment indicator and the Elliott wave conrm
each other. This is how it works:
There are two indicators to measure sentiment - BTI
and 34-day BTI.
Rising BTI = bullish sentiment = short term trend is
up
Declining BTI = bearish sentiment = short term trend
is down
To reduce the number of false signals the 34-day
BTI is used as a lter
Sentiment becomes bearish when the daily change
in the BTI turns from up to down AND the 34-day
BTI is declining. After a bearish signal has been
triggered, both the BTI and 34-day BTI will continue
to decline. This combination of declining indicators
indicates that sentiment is bearish. During this
period most stocks will perform poorly, the FTSE
100 is likely to go down.
Sentiment will turn bullish when the daily change
in the BTI turns from down to up AND the 34-day
BTI is rising. As long as both the BTI and 34-day BTI
continue to rise I assume that sentiment is bullish.
During this period most shares will outperform the
broader market and the FTSE 100 is likely to rise.
Statistics show that when sentiment is bullish, the
FTSE 100 goes up by an average 1.5% and when
sentiment is bearish, the FTSE 100 goes down by an
average 0.6% in the following month.
My sentiment indicator gives me the direction of the
FTSE 100, for example, when it is bullish, I assume
that the trend is up. This helps me interpret the
Elliott wave count on the chart. The trend remains
in place until sentiment reaches an extreme. On 22
May, the 34-day BTI reached an extreme above 400
(extreme in bullish sentiment), that was signalling
an imminent trend reversal. The FTSE 100 did turn
down on that day and lost 8% in the following three
weeks.
Elliott wave theory was discovered by Ralph Nelson
Elliott in the 1930s, he was an accountantturned-
stock-market-analyst who noticed that the stock
market followed a recurring and predictable pattern;
he called this pattern the wave theory. In the
nancial markets, these patterns take various
shapes, the most common being a cycle
occurring in eight waves, consisting of ve waves
up and three waves down.
The most important aspect of Elliott wave theory is
that it works well with investor sentiment. In general
the end of a ve-wave pattern coincides with an
extreme in sentiment. For example, at the top of
a ve-wave sequence sentiment will be extremely
bullish and at the bottom, sentiment will be
extremely bearish. This makes sense if you think
about it, the more a market rallies the more it makes
investors feel safe and the more investors join the
rally. This explains why bullish sentiment increases
as the rally progresses.
But as we know, rallies dont go on forever as we
have seen recently - I am referring to this years
stock market rally that ended on the 22nd May. On
that date, and during the previous weeks leading
upto the peak, bullish sentiment reached an extreme
on various measures. Ironically its when there are
too many bulls that the rally ends. Bullish sentiment
is healthy for the stock market as it enables the rally
to continue but too much of it is never a good thing.
In fact, excessive bullish sentiment is a sell signal.
This led me to develop my own sentiment indicator
a few years ago, the Bullish Trend Indicator (BTI). I
was looking for a way to measure excessive
sentiment. The BTI does the job. Today, my primary
tool to forecast the stock market is Sentiment
Analysis, and when combined with Elliott wave
analysis it can be a powerfully accurate trading
indicator. I trade mainly UK stocks and the FTSE 100
index. My secondary tools are technical analysis
indicators like the relative strength momentum and
the MACD.
ELLIOTT WAVE THEORY WAS DISCOVERED BY
RALPH NELSON ELLIOTT IN THE 1930s, HE WAS AN
ACCOUNTANTTURNED-STOCK-MARKET-ANALYST
WHO NOTICED THAT THE STOCK MARKET
FOLLOWED A RECURRING AND PREDICTABLE
PATTERN; HE CALLED THIS PATTERN THE WAVE
THEORY.
Using Elliot Wave Theory in Trading
School Corner
BTI SENTIMENT CHART
During the decline sentiment turned bearish on 5th June. As I write sentiment is till bearish but this time the FTSE
100 has fallen too fast and bearish sentiment has reached an extreme on my indicator - see chart below.
This, to me, means that we will see a big bounce. The main support area is around the 200-day moving average
near 6150. Whether or not the FTSE 100 declines to that level remains to be seen, but I do expect a bounce to
6500 in the short term to relieve the oversold condition. I will then monitor my sentiment indicator, if it stays
bearish during the oncoming bounce it will be another signal to prepare for the next leg down.
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Special Feature
WHEN THE BEST
TRADE IS NO
TRADE
BY THE MARKET SNIPER
The feeling was always one of, if being a lecturer or
trader with extensive experience, it was almost my
duty to have a view on all markets, otherwise what
was my purpose?
I no longer feel this degree of discomfort in
expressing this view.
In attaining this level of comfort, I had also
subsequently differentiated between:
1. Market Commentary/Commentators Most of
this type of opinion appears to have a very after
the fact tone, and is usually in the form of post
event analysis for the news wires.
2. Basic rudimentary opinion This may have an
expression of mild directional bias only, with a few
supporting technical observations.
3. Justications for a trade These vary per trader, but
my feeling is that the better trader you are, the more
detailed and specic these will be. By denition this
type of opinion proposition is pretty rare.
In the past, when approached for a view on a market by my students or other
traders, I felt a degree of discomfort when expressing, especially repeatedly
across various markets, that I had no strong overriding opinion or trade.
When the Best Trade is No Trade by the Market Sniper
Some examples of what I seek in a trade before it
is taken are:
(a) An explicit high probability assessment of an
anticipated directional move.
(b) The nature of the anticipated move is impulsive
and brisk.
(c) A volatility constriction which permits a tight
entry-to-loss stop set up and a fast move to a high
reward-to-risk ratio and realised losses. What I dont
want is the long bleeder type trades that sap you
emotionally over an extended period as you watch
it move against you/go nowhere.
Additional trade overlays include those where I
perceive a substantial imbalance in supply or
demand for a certain period that supports the
dominant and brisk market re-adjustment and,
importantly, a trade idea where pending orders may
be used and the entire trade idea may be expressed
in advance of being triggered, including loss stop
placement and targets.
As a trading technical analyst, where every piece of
analysis should contribute some detail to the
questions Is there a trade? or What is the trade?,
I have observed with my own students that most
new and intermediate traders have insufcient
distinct and separate justications for a trade plan.
I dont care for item one above, certainly not before
a new trade; at best market commentary is
interesting in a historical sense for the story of why
or what commentators believed was the reason
why. But that, sadly, is about it. What I want to know
is whats going to happen?!
Basic rudimentary opinion as described in item one
is just that, non-committal and luke-warm in nature.
It does not inspire me to detail an elaborate if and
but response where multiple price behaviour
permutations still remain possible, and for those
reasons I avoid reading these too.
The advantage retail traders have
over institutions
Your average Joe retail trader fails to realise that
they actually have major advantages over the
institutions, brokers and market makers.
Number one on that list is the right to say No
Trade.
Remember, many institutions or market makers are
obliged to offer a spread on many underlying
instruments all the time. This even applies when
uncertain of their view, or just before possible market
moving events. If they get it wrong, many traders
observing and then acting will be piling up substantial
winning positions at their expense.
Imagine the mental and psychological burden of
having to open shop every day and every rival and
client is watching and waiting for you to slip up on a
pricing of a market so that they can all wade in and
clear you out.
Some of these market makers must make a market
on the most lightly traded small cap shares with high
Betas and massive potential swings. There are not
many sympathisers out there for the dreaded market
maker but, I have to admit, I am one of them!
I have noted too that relatively novice traders feel
what I can only describe as compulsion to trade. It
is difcult to go to work, supposedly to trade, and
to do what is seemingly on the surface nothing. It
doesnt feel like trading to just observe, analyse and
plan trades. We want to place some skin in the game,
a view(s) expressed! But real trading is about sitting
and waiting in the lair for the good risk:reward set up,
having the capital to back and then pulling the trigger.
My own experience is one of far fewer trades open at
one time than when I rst began trading: usually none
open at all 35% of the time (over a period of a year),
one trade idea open 30% of the time, two trades open
25% of the time and three trades open 10% of the time,
never more. This is what works for me; whilst hardly a
bench mark of good form, major deviations from this
over the course of a year would raise concerns of over
trading or lack of selectivity in my opinion.
Even in benign non-directional markets, we will look
for signs as to the future direction and generally jump
in early.
REMEMBER, MANY
INSTITUTIONS OR
MARKET MAKERS ARE
OBLIGED TO OFFER A
SPREAD ON MANY
UNDERLYING
INSTRUMENTS ALL THE
TIME.
We are taught to trade with the trend and to the
range highs and lows when ranging or chopping. I
suspect this is encouraged by brokers who earn on
the churn; their line being that there is a strategy
for every market. In short there are no
circumstances or market conditions where we
shouldnt be all in! We know better. Aside from a
strongly trending market like that seen on USDYEN
recently, and where we should have wide stops and
remain with it as long as possible, many of the other
timescales in the market cycle we should not be in
the market at all.
Other manifestations of this rookie error that
shows a lack of appreciation for the No trade
advantage is a full suite of open trades on their
market blotter.
There is no broad portfolio of trades theory,
especially when leverage is involved. Each idea
must stand up on its own. I suspect this tendency
of many traders is in the hope that if enough trades
are placed, one will be a home run a form of
asymmetrical optimism bias.
Keep the number of stocks you own to a
controllable number. Every once in a while you
must go to cash, take a break, take a vacation.
Dont try to play the market all the time. It cant be
done, too tough on the emotions. Jesse
Livermore
Jesse Livermore was a bucket shop punter who
made and lost a fortune on no less than seven
occasions in 1920s New York, I believe, and his book
Reminiscences of a Stock Operator is, in my
opinion, the best trading book there is out there.
Heres another classic (and true) quote:
There is also the Wall Street fool, who thinks he
must trade all the time. No man can have adequate
reasons for buying or selling stocks daily or
sufcient knowledge to make his play an
intelligent play.
In short, sometimes it pays to just sit and wait for the
high probability trade that meets multiple & specic
criteria, and to not generate losses in between these
events.
There is a lot to be said for the empowering position
of getting square, namely being entirely at on all
open positions. It allows a market neutral mentality
without any legacy biases that may once have had
justication, but now fails to hold. Think about this
statement for a moment all those of you that have
been cut out of loss making positions the
common comment from many traders at this point,
even if it means they have taken a loss, is that they
feel relieved. Well imagine cutting yourself out
instead of it being done for you if a trade(s) is not
going your way. Take some time away and then
reassess youll be amazed how, in many instances,
you probably wouldnt get back into the trade.
Institutions and market makers cant do this. They
have to be there. This is the major advantage you
have as a retail trader and it is an advantage you
should be aware of and not squander.
THERE IS A LOT TO BE SAID FOR THE
EMPOWERING POSITION OF GETTING SQUARE,
NAMELY BEING ENTIRELY FLAT ON ALL OPEN
POSITIONS. IT ALLOWS A MARKET NEUTRAL
MENTALITY WITHOUT ANY LEGACY BIASES THAT
MAY ONCE HAVE HAD JUSTIFICATION, BUT NOW
FAILS TO HOLD.
Special Feature
When the Best Trade is No Trade by the Market Sniper
Here are some guide points for controlling over
entering trades, revenge trading and other
compulsive responses:
Trading is a game of increment, not home runs
(one big hit outside of the park).
Remember that.
Cease all trading for the week after three
within limit losing days. You havent got the
right view on the market less is more so
switch the computer off. To spend ve days in
a row reducing balance is condence
destroying and emotionally destabilising. Put
this in as a commandment.
Good luck.
Reduce the number of trades. Take the
number of trades taken in a week (or month),
an average of the last 10 weeks (or month),
then allow yourself just 60% of your average.
Cross them off on a piece of paper as you use
your new maximum allowable amount; you
will become more selective with what you
trade.
Do full, detailed pre-calculation position
sizing and risk-to-reward analysis before
entering, it will force you to think about your
stops and accept where you are wrong. It
also increases discipline.
Each week review your full personal Prot
and Loss statement performance and assess
all records to show you are within limits, and
reward yourself for sticking to the rules even
if it is a week of controlled losses.
1
2
3
4
5
Francis Hunt is the founder of The Market
Sniper and the Hunt Volatility Funnel set up
trading technique. His next three month
Trading Metamorphosis Program commences
6th/7th July with a theory weekend.
You can email Francis@TheMarketSniper.com
or call 07833096952.
Special Feature
FTSEDAYTRADER.COM
MY STORY
I started spread betting in 2007. The hours were long and the
returns were, to be blunt, rubbish. I in fact blew my entire
account up twice, but as I started with small stakes was able
to dust myself down and start again. It was only in 2010 that I
turned the corner and, I am pleased to say, have been
successfully trading the FTSE ever since. Spread betting is great
its hard work, but its also highly rewarding.
BY NICK HILSDEN
Unfortunately, too many
people fail as they start off
somewhat gung-ho
thinking its easy and, in an
open industry secret, very
quickly blow their accounts
with no chance of then
coming back... They say 90%
fail thats probably light,
and the sad fact is that the
smaller your account the less
I then wrote an ebook on my strategy and, to my
continued surprise, it actually sold via the site.
Spread betting is hard whether its stock,
indices, forex or anything else. After all, if it was
easy, everyone would do it, right? However, get it
sussed, stay emotionally detached, be technical, be
savvy, be calm, be sensible basically the opposite
of every emotion you will feel when you trade and
generally you will do OK.
What I have learnt?
I am a great believer in the KISS principle Keep it
Simple Stupid and apply that principle to all my
charts. Too many indicators just lead to you ending
up like a rabbit in the headlights. I use pivot points,
support and resistance and trend channels on a
daily timeframe for my analysis and this has served
me well, even in a market that is supposedly QE and
sentiment driven! Ill also let you into a secret do
the opposite of whatever they say on the BBC news
about shares and the FTSE if they say the market
is tanking and get their big red arrow charts out
(an appearance from Robert Peston is even
better) BUY shares and the FTSE a stance
again I know that the editor of this mag agrees
with.
likely it is that you will make money. I feel fortunate
that I remain in that 10% (or less).
Whilst trading for myself pretty much full time, I
needed to learn about a product called WordPress,
which is a website creation software. It was always
my plan to set up a website with a topic that
interested me and it made sense therefore to do a
trading site, which can be found at
www.ftsedaytrader.com. There are hundreds of sites
out there of course, but as my main aim was initially
to just learn to use the software; I initially planned to
simply write about what I had learnt and what I was
thinking vis-a-vis what the FTSE was going to do
next. From this small acorn and effective
self-imposed checks and balances on my trading,
to my amazement, my website trafc grew.
FTSEDayTrader.com My story
They can of course be plotted over any time frame,
but I nd doing the last 10 and 20 daily sessions
pretty reliable. Trading at the extremes of these
channels has also been very benecial in recent
months. You wont get trades every day, but,
generally, the handful that you do trade should do
well. Below is an example of a recent FTSE Raff
chart.
If the headline says the FTSE is rocketing and is on
its way to... oh, lets take the other weeks 7000 level
that they mentioned, get SELLING! (FTSE was at
6800 at that point; it subsequently fell to 6300, a
500 point drop in two weeks).
Raff Channels
Of course, its not just that simple (if only!) and one
needs a local and global view of everything going
around one, the internet is your friend for this! One
of my favourite indicators are Raff channels and I
plot these on the daily chart over 10 days and 20
days creating a nice two line channel that often
marks price extremes.
Special Feature
RAFF CHART
We have recovered from the QE being tapered
rumour-driven drop to 6300 and whilst the trends
are down currently it feels like there might just be
one last push higher. The FTSE didnt make any
record highs whilst other markets like the DAX &
Dow and S&P did. I certainly feel that a test of
possibly 6830 is possible in the next two to three
weeks (time of writing 10 June).
If you would like to learn more about me and my
strategies, please visit the website
www.ftsedaytrader.com
My other favourite common sense trading tip is
when you are in a trade and (hopefully) in prot,
get stops to breakeven as soon as possible. Trailing
stops are a good way to lock in prot and remove
the emotion from a trade, which is one of the
hardest things to overcome.
Outlook
Everyone is aware of the Sell in May mantra now
(as was covered extensively by this magazine last
month) so I expect that we will probably see some
more bullishness for a little while just to try and
wrong foot as many as possible (as the market is
wont to do!), probably towards mid/end June time.
FTSEDayTrader.com My story
TRAILING STOPS ARE A GOOD WAY TO LOCK
IN PROFIT AND REMOVE THE EMOTION FROM A
TRADE, WHICH IS ONE OF THE HARDEST THINGS
TO OVERCOME.
JOHN WALSHS
MONTHLY TRADING
RECORD
As you are aware, we recently hit new highs with
the DOW and were very close to touching the all
time high for the FTSE, but we have since seen a
pretty sharp retracement, certainly in the UK. But,
for me, it has been a great trading month for many
reasons. It was in fact brought to my attention a few
days back that I have now been trading my account
with my own money for fully six months since
winning the Trading Academy competition (I won
at the end of November and took December off
and started full time in January) and, not
surprisingly, a lot of fellow traders seem to be
interested in how I have done in that time,
wondering whether the win was a uke, or if indeed
I had the necessary mettle as a trader to survive.
As I have stated previously, February was my worst
month ever. In the very short space of time that I have
been trading on my own, I lost almost 60% of my
account in a single morning during that dire month.
Shocking I know, and which was down to me doing
everything I was taught not to do if you want to
succeed at trading: averaging down, letting emotions
dictate your strategy, chasing losses and increasing my
trade size to levels well outside my comfort zone. You
name it I did it, which made a bad situation a lot worse
(as these things tend to do). Net result was that
emotionally I was unable to trade indices from then as
I felt I had lost some of the condence that is needed
when doing battle in the markets and which helped me
do well in the past.
What a month! Its the only way I can start to describe what has taken place
since my last article.
For those of you that read my monthly piece, you will know that I mainly day
trade indices (DAX, FTSE and DOW) and I also like to trade with a little more of
a long term outlook when it comes to equities.
TRADING ACADEMY WINNER
I NOW TREAT TRADING AS A BUSINESS
INSTEAD OF JUST A HOBBY OR PAST TIME
WHICH I MAY HAVE BEEN A LITTLE GUILTY
OFF IN THE PAST.
John Walshs Monthly Trading Record
And so I decided to just trade equities again with
somewhat more of a longer term outlook instead
of going after the fast money with the indices. That
worked out ne and so I then decided I was ready
to start trading indices again (sucker for
punishment, eh?) and, so far, things have gone very
well. I have managed to recover all the losses on my
account and am actually up 15%. Not surprisingly
Im very pleased with this and of course hope to
build on it.
What have I been doing differently since I started
trading equities again? I now treat trading as a
business instead of just a hobby or past time which
I may have been a little guilty of in the past. As in
any business, the key to success is hard work and
tenacity. Trading is no different. Another element
that I have brought to my trading is to set myself
short term goals such that I now aim for 10 points a
day whether that be from one trade or 10, and once
I have achieved that I close down for the day so
that by the end of the week I have made 50 points
which I look to just keep building on.
The most important lesson I have re-learned, and
which I have tried to live by in the past but
sometimes failed to do so (particularly during Feb!)
is to trade what I see not what I or my ego thinks. I
now never try to call the highs or lows and I wait for
conrmation before entering the trade, be it on the
Long or Short side.
Moving forward, I plan on sticking to what I have learned
so far and to keep on learning (you never stop learning
in the markets, I hear) through talking to other traders
and reading lots of the stuff out there to help us, be it
books or online (some of the guides given away here
by SBM are really informative and written by seasoned
traders. Best of all, they cost you nada!).
I also plan to increase my trading of equities (my true
trading passion) and to add US equities to my portfolio
(the research has already begun).
Anyhow, thats enough from me for this month, I hope
you enjoy reading this as much as I like to write it and I
look forward to returning next month to keep everyone
up to date with how Im doing with my trading journey.
Please continue to follow me on Twitter
@_JohnWalsh_ where I try to keep everyone up to
date with my trades as they happen.
Remember, you control the trade; the trade does not
control you.
John
A new special feature
MARKETS
IN FOCUS
Markets In Focus
Competition
Guess the FTSE month end value to win
1000
Guess the FTSE month end value to win 1,000
In keeping with the betting and trading theme of this
publication, Spreadbet Magazine offers entry to our
competition to all readers.
Simply click the link at the bottom of the page to arrive at our competition page.
Insert one entry as to what level you believe the FTSE 100 will close at on the last trading
day of the forthcoming month.
PLEASE NOTE THE CLOSING DATE - The last day for entries is the second Friday of the
forthcoming month. For this months entries - July 12th is the closing date.
Rules
1. Only one entry is allowed per person. If multiple entries are found to be made, that
partys entries will be voided in full.
2. Entries received after 5pm on the closing date will not be allowed.
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4. Entries must be made to the nearest one decimal point, ie 5456.8.
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In next months edition...
The e-magazine created especially for active spread bettors and CFD traders Issue 19 - August 2013
LEGENDARY
FIDELITY FUND
MANAGER JEFF
VINIK PROFILED
ZANAGA IRON
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trading is protable during the forthcoming month.
See you next month!

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