Stock Market Update for week ending 15 August 2008

First, welcome to those who are new to the ECAM blog site.

Those who have followed the website for some time know my investment philosophy and writing style. For those who are new to the site, I recommend reviewing some of my previous blog posts to gain a basic understanding of how I use technical indicators to position my A and B account investments within the Provident Fund.

I plan on providing some links in the near future addressing some of the most commonly asked questions I get (the basics of how I utilize technical analysis in portfolio positioning, my personal investment strategy, etc) but in the meantime it would be beneficial to have a look at some of my previous posts to give you an idea of how I invest within the Provident Fund.

The most important thing I must stress to those who are new to the site is that the Emirates Provident Fund is a very benign investment vehicle that offers participants a very limited choice of funds (all "long funds") and therefore a very limited opportunity of substantial return on investment, especially in a period of declining equity prices (in discussions I have had with the EK Provident Fund administrator, this is by "design").

What you need to understand is that no fund (s) within the A or B accounts will ever provide any substantial capital gains without market timing due to the broad based structure of the chosen funds allowed within the A and B accounts (and also to a lesser degree the C account) and their mandate of being 100% invested at all times in the equity markets irrespective of the technical or fundamental nature of the markets. These are strictly "relative return" funds (which benchmark their performance based upon the performance of their chosen benchmark). As such, if the benchmark goes down 20% but the fund has only gone down 19%, they consider that a success. Not in my book it doesn't.

This is the reason why I personally have only the mandated A and B contributions within the funds (that I manage on an ongoing basis to provide for an "absolute" return) and have my personal "C" fund invested outside of Emirates in a discount brokerage account (that I manage on a daily basis).

If I had a choice I would have NO money in the Provident Fund but that is not possible given the Provident Fund structure. As such, it is my desire to maximize the limited potential that is available in the A and B accounts utilizing market timing through technical analysis. My personal "C" fund is held outside the Emirates provident fund and utilizes strategies that allow for capital gains during both market advances as well as declines based upon the same technical analysis techniques I use to manage the A and B accounts.

On another issue, I must apologize for the disjointed view of the website recently as the blog hosting site did a recent "product enhancement" and, in my opinion, they did nothing more than mess up the format that was in place. I plan on updating the layout of the blog to a more user friendly format in the near future but will not do so until I have the time (and can warn you in advance to allow you to confirm your email subscriptions are still going through when I reformat the site....there have been problems in the past when I switched formats and email updates were not being issued).

Enough of the admin......here is the latest update to what is going on.

To start with, here are the year-to-date returns for the funds I hold within the Provident Fund A and B accounts:


Core Holdings (currently approx 92% of portfolio):

Fidelity Australian Dollar Fund: +3.97%

Fidelity Euro Fund: +2.12%

Fidelity International Bond Fund: -2.38%


Ongoing Equity Purchases (currently approx 8% of portfolio):

BlackRock/MLIM Equity: -17.37%

Fidelity International Fund: -16.59%

Russell Global 90 Fund: -14.85%


Representative Charting Index:

Dow Jones World Index: -15.52%

Those that have been invested in currencies (the Euro and Australian dollar; not the UK pound) and the bond fund have done relatively well. Those invested in Equities have been hammered.

There has been a huge dichotomy within world stock market indexes the past several weeks.

In general, the U.S. equities have done rather well (my "summer rally thesis") but the rest of the world has done poorly. As a result, the Dow Jones World Index (which benchmarks our broad based A and B account provident fund equity indexes) has gone no where.

First chart is the Dow Jones World (DJW) 1 year line chart (click all charts to enlarge):



You can review my previous posts to go over the past technical indicators that turned this chart bearish.

To date nothing has changed in the technical indicators (bearish) but I must point out that the MSCI World Index-ex US (the bottom of the chart) has established a new low while the DJW index has not. The reason for this is that the the rest of the world is thought to be going into recession while the US may be near the end of its current recession. I do not agree.

U.S. market indexes have done fairly well over the past 2 weeks (which form part of the DJW index) while the rest of the world is in decline (hence the MSCI index has continued to decline). This is not a good sign for the A and B account provident fund equity funds as they are all broad based world equity funds. In other words, the US is doing ok but the rest of the world sucks. While a country specific fund (the US) may be on a buy signal, none of our A and B account funds are due to their more broadly based "world exposure".

In my last blog, I mentioned I was looking for a summer rally before another market decline. I also said I would not make any equity purchases until the chart/technical indicators indicated it was safe to move back into the markets. This has not happened in the DJW and we may be on the verge of another SIGNIFICANT price decline.

I have highlighted what is known as a symmetrical triangle that has formed over the past week in the DJW index. This pattern is well defined and has broken below the lower trend support line (as can be seen on the chart). What is important to understand is:

1) the symmetrical pattern was entered from above and therefore should exit below (as it has), and

2) normally if this pattern is confirmed, it indicates a "measured move" type of pattern (where the start is equal to the end), and

3) upon confirmation of the pattern (a break below the low @ 251.23) this would signal a continuation of the downtrend.

The bottom line is if price breaks below 251.23 we can extrapolate the move as follows:

-297.19 to 251.23 = 45.96 points

-a break below 251.23 leads to a target of 205.27 (251.23 - 45.96 = 205.27)

If the 251.23 support breaks that is where I think we are heading. That is further 18% from current levels.

I have not included the other charts I normally analyze as nothing has changed (they are all still bearish). It is still too early to commit to buying equities at this stage.

I am including a chart of the Fidelity International Bond Fund. I have maintained a 50% position in this fund for the past 6 months on the thesis that as the world goes into recession and central banks cut interest rates the value of international bonds will advance. This has worked well up until this week or so.

What changed this week is that the USD has had a significant advance and the Fidelity International Bond Fund is not currency hedged (in other words, the majority of the holdings in the fund are in non-US bonds and therefore non-US currencies). As a result, should the USD show continued strength going forward then the fund will decrease in value irrespective of the underlying correct thesis that world bond prices will advance (and individual country bonds are advancing in price in their own currencies).


It can be seen that this fund topped out towards the end of March. I have been watching for a retrace to the previous support low around of the support line at the 1.154 area. This week the fund broke this level and thus is technically in a bearish pattern.


Bottom Line:

There have been huge moves in the currency markets over the past week based upon the assumption that, while the U.S. is probably already in recession, the rest of the world may soon join them.

This should ultimately be good for bonds denominated in their "home currencies" (US treasuries in USD, Gilts in UK pounds, German Bunds priced in Euro's, etc) but with our provident bond fund being fully exposed to dollar strength (due to its un-hedged position), the upside looks limited.

Over the next week I will be repositioning my portfolio as follows:

-75% BlackRock/MLIM US Dollar Cash Portfolio
-25% Fidelity Australian Dollar Currency Fund

I will be doing so on any significant pullback in the USD (short term) with the view that the longer term trend of the USD has changed to bullish.

I will maintain my cash position until I have evidence that equity positions are safe to enter. There is no technical evidence to date that now is the time.

I will blog immediately when I make my changes.