Introducing the ‘Fusion Method’

Yesterday I explained why I thought a person shouldn’t get too bearish on this market. Overnight, US stocks soared for the first time in a week on the back of Warren Buffett’s huge purchase of aerospace manufacturer Precision Castparts.

Even commodities lifted themselves up off the floor. Gold traded nearly as high as US$1,110 and finally appears like putting in a weak bounce following the big sell-off of recent weeks.

After a great rally yesterday, the Foreign market looks set for an additional strong session today.

Does this imply I’m right? Is the modification over? Kris Sayce and I ponder this particular very question in the second hit of our Facebook mini video clip series. Simply click on the screen shot below (and remember to ‘like’ it!).

Of course, I’ve got no clue what’s going to happen tomorrow or the next day. But that’s not necessarily a bad thing. In fact, knowing that you don’t know is a major advantage. It’s when you think you know how things will play out that you get into trouble.

That’s the reason why I’ve developed a new kind of analysis that fuses each fundamental and technical abilities. I’ve been testing and using it since November last year and so far, the results are extremely impressive.

You’ll hear more about how it works later this week. I’ve just finished putting a report together on it and plan to send it to you on the weekend, so watch out.

The big idea though is to not be too wedded to any 1 view. While it’s important to have a view, being too rigid can cause losses or missed opportunities. I wrote about this to my subscribers lately. It a really important subject to tackle if you want to develop being an investor so I’ll recreate some of it here…

‘Being a slave to your prejudices or even biases is the greatest mistake you can make as an investor. I’ll tell you a story in a moment that confirms this and recounts my biggest investing mistake.

‘Yet the finance industry and also the financial media make little attempt to genuinely educate investors towards falling into this snare. Rather, they take advantage of your feelings!

‘Perhaps that’s because investors enter the trap with such ease time and time again. And they put their poor decision making down to just about everything however their own failures.

‘But let me tell you: you don’t lose money in the marketplaces because you’re unlucky. And you don’t lose money because somebody did or said so-and-so. You shed because you’re trapped in a story of your own making. This trap is built out of inherent prejudices and ethical judgments about the way issues ‘should be’.

‘This is not meant to be the sermon. I’m saying this simply because I’m guilty of the same mistakes. Guilty of thinking the world is a mess, and that the problems that led to the 2008 crisis only have grown worse in the years since. Guilty of thinking that due to this, an even bigger stock market fall lies ahead.

‘More than that though, I’m guilty of thinking the future will, or should, play out according in order to my view of the world. What hubris to think I can tell the future!

‘We’re told good investors have highly held views — that they have confidence and make bold calls. And that is true. But good investors also know that they don’t understand. And they are ready to change their views if things don’t pan out the way they expected.

‘They are not locked into a narrative. Nor do they put their money where their morals are.’

Of program it’s not easy to put your biases aside and invest truly objectively. But it IS possible…and it’s easier compared to you think.

Last year, after considering long and hard on this, I developed a system of analysis that fuses two traditionally separate investing methodologies to test my opinion against the market’s view. Yesterday, I said I’d show you how you can use this particular ‘fusion method’ to buy and sell person stocks.

Let me show you how it works. An example is in the energy sector. Essentially, many large Aussie power stocks look vulnerable. That’utes because they’ve spent billions investing in massive liquefied natural gas (LNG) projects over the past few years. More to the point, they invested in the expectation of higher oil prices.

Now, just as individuals projects kick off, the price for LNG (that is linked to oil prices) is really low that the returns on the capital invested will be very reduced indeed. More than likely, the results will be below the cost of funds. Such an outcome doesn’t bode nicely for share price performance.

But because these are such large and longevity projects, companies will continue in order to produce despite lower prices. It’s not as if they can just sit down and wait for prices to recover.

So the basic story is negative. But do the charts back this view up? Indeed they do. Let’s have a look at one of the more susceptible Aussie energy stocks, Santos [ASX:STO].

It has a sizable exposure to new LNG production. This should lead to a big jump in earnings. But it’s unlikely to occur. The market is telling you to be very cautious. Have a look at the graph below:

The first warning sign that something was wrong with STO occurred on October 2014. I mentioned ‘shifting averages’ yesterday. They remove the noise that comes from daily price unpredictability. They are a good indicator from the underlying trend. As you can easily see in the chart, the moving averages crossed over in October last year, signifying the stock price was in the downtrend. This was a signal to escape.

Then the stock collapsed in The fall of and December before the bottom pickers came in.

But here’s the problem. The buyers were swimming from the tide. They were fighting the trend, that is always a low probability outcome. Despite a series of bounces in the share price because December 2014, the trend continued to suggest down.

And just recently, the inventory made a new low. This confirms STO’s downward trend. Trying to pick the bottom is a harmful game. I know, because I’ng played it before. Sometimes you win, sometimes you lose.

In this situation, the ‘fusion method’ of analysis tells you to stay away from the sector. Poor fundamentals combined with an adverse technical outlook is a red-colored flag.

And it’s not just Santos. Woodside [ASX:WPL], Oil Search [ASX:OSH] and Origin Energy [ASX:ORG] are all in downtrends. WPL and OSH are close to producing new lows while ORG recently broke down to new lows.

The message here is that this is not a stock specific issue. The whole LNG sector is under pressure. Avoid these types of stocks for now. They may be great buys now, but you’lso are taking a big punt. Wait for the pattern to turn first.

I’ll explain the best way to spot a change in trend in a few days. For tomorrow though, I wish to focus on something I discovered very recently — the fatal drawback in value investing.

Regards,
Greg