Spencer Li

The January Barometer: An Accurate Predictor of Stocks for 2017?

1 5

There are many speculations about leading indicators in the market, and one of the most popular ones is the January Barometer. In this post, we will explore this phenomenon, and see if it holds up to the test, and whether it will provide any useful insights going forward.

WHAT IS THE JANUARY BAROMETER?

“As January goes, so will the market go for the year.” – Wall Street Folklore

The January barometer is a tool used to determine if the year will be bullish on the equity space. If January sees a winning month, the year would be a winning year.

January can be said to be an indicator to whether the year would be bullish or not.

This idea first emerged in the 1972 edition of Yale Hirsch’s Stock Trader’s Almanac. Here’s what was published:

“We doubt that any technique or indicator ever devised has been so remarkably accurate as the January Barometer. The barometer, which indicates that as January goes, so will the market go for the total year, has proven correct in 20 of the last 24 years…. Very few stock market indicators show such an 83.3 percent accuracy for even short spans of time.”

 

https://www.instagram.com/p/BPuVVnxj8Yt/?taken-by=iamrecneps

 

PREVIOUSLY… INVESTIGATING THE SANTA CLAUS RALLY

A couple of months back, I collected statistics for a simple ‘buy in January, sell in February’ portfolio. How it works is simple: I would purchase the stock index on 1 January, and sell it on 1 February and see the results.

Buy in January, Sell in February Statistics

2011: 4.34%

2012: 1.28%

2013: 4.55%

2014: 5.62%

2015: -0.08% — Total returns for 5 years = +15.71%!!!

Over the last 5 years, it has indeed been a great run for the ‘buy in January, sell in February’ portfolio.

This got me excited, but I decided to look further back in history…

Breaking up the time periods into 5-year chucks, here are the statistics:

5-year “Buy in January, Sell in February” Statistics

2011-2015: +15.71%

2006-2010: -8.7%

2001-2005: +0.88%

1996-2000: -6.38%

The santa claus rally didn’t really exist as claimed by most sensationalists.

This time, we want to look at whether January tells us if the year would be a winning year.

 

JANUARY BULL RUN = WHOLE YEAR BULL RUN?

Quantpedia has a good summary of this, and the strategy is simple: Invest in equity market in each January. Stay invested in equity markets (via ETF, fund or futures) only if January return is positive otherwise switch investments to T-Bills.

To put it more simply, there are two scenarios:

Scenario 1: January positive –> Stay invested in equities

Scenario 2: January negative –> Exit equities

The results are shocking. Quoting from a research paper titled: “What’s the Best Way to Trade Using the January Barometer?” (M. J. Cooper, J. J. McConnell, A. V. Ovtchinnikov, 2009)

“We investigated the power of the January market return to predict returns for the next 11 months using 147 years of U.S. stock market returns.

Using 147 years of U.S market data, this was the result:

We found that, on average, the 11-month holding period return following positive Januarys was significantly higher, by a wide margin, (-7.76%) than the 11-month holding period return following negative Januarys.”

This meant that on average, a year with a positive January outperformed a year with negative January by 7.76%. This is a very significant difference.

 

 

https://www.instagram.com/p/BOquPBmjdbj/?taken-by=iamrecneps

 

5 TRADING STRATEGIES THAT WERE RESEARCHED

In the research paper that I mentioned above (you can read the whole paper by downloading it in the link at the bottom of this article), here are 2 strategies that can be taken knowing that January is a good predictor of the market for the rest of the 11 months:

(1) LONG/T-BILL STRATEGY

Long in Jan, continue being long if Jan is positive, but exit and go long on bonds if Jan is negative.

(2) LONG/SHORT STRATEGY

Long in Jan, continue being long if January is positive, but go short if Jan is negative.

The results for 1857 – 2008 are highlighted below:

1-4Strategy 1 ( completely outperformed strategy 2.
Source: Page 21 of “What’s the Best Way to Trade Using the January Barometer?” (M. J. Cooper, J. J. McConnell, A. V. Ovtchinnikov, 2009)

In the research paper, 5 strategies were outlined, but I only cover the 2 that are relevant to our discussion.

It seems that this would be a very profitable strategy:

Firstly, buy stocks in January.

If January is positive, remain long on stocks from February to December.

If January is negative, exit stocks and go long on bonds from February to December.

In addition, the research paper also published returns for the years 1940 – 2008:

2
Strategy 1 completely outperformed strategy 2, even in the recent 70 years.
Source: Page 23 of “What’s the Best Way to Trade Using the January Barometer?” (M. J. Cooper, J. J. McConnell, A. V. Ovtchinnikov, 2009)

 

https://www.instagram.com/p/BOZFaacjNwq/?taken-by=iamrecneps

WHAT HAPPENED THIS YEAR?

sti-1030x478The STI is up 5.5% for the month of January 2017. Going by the strategy outlined above, if you are a buy-and-hold investor, it would be wise to hold the STI until the end of 2017.

 

dow-1030x473On the contrary, for the Dow, we’ve only seen a +0.4% increase in Jan 2017. At the time of writing this (2:00am Singapore Time, 1 Feb), it still makes sense to hold the U.S stock index until the end of 2017 (if you’re a buy-and-hold investor). That being said, it’s wise to employ price action strategies and focus on a precision entry/exit if you are already long.

While the January barometer is good information to know, it’s largely a super long-term strategy (10-20 years) and investors will position themselves well if they have strong price action fundamentals in a generally bullish market.

Going forward, I expect the stock market in both Singapore and U.S to be bullish. This is a probabilistic approach; I would still be making trades based on solid price action strategies, and make portfolio adjustments where necessary.

All the best for 2017, and happy trading! I hope that this article has shed some light for those who hate reading research papers 🙂

 

RESEARCH SOURCES & REFERENCES

investopedia.com/terms/j/januarybarometer.asp
cnbc.com/2014/01/30/uld-totally-ignore-the-january-barometer.html
quantpedia.com/screener/Details/113
papers.ssrn.com/sol3/papers.cfm?abstract_id=1436516
fullertreacymoney.com/content/2010-03-02/Januaryeffrct.pdf
Cover Image: wallpapercave.com

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Spencer Li

Dubai, South Africa, Lesotho – Over 3,000km by Road!

south africa trip

Last month, I embarked on a 2-week trip to Dubai, South Africa and Lesotho, and  it was truly a unique experience, especially driving over 3000km in 2 weeks, trying out the shark-cage diving, riding an ostrich, and doing a self-drive safari.

And the best part was that by continuing to trade 15 minutes a day, I managed to make a tidy 5-figure profit during these 2 weeks of travelling, which was more than sufficient to cover the cost of the whole trip! 😀

To see the full photo albums for this trip, please visit: https://synapsetrading.com/travel-log/

 

Here are some photos from the trip:

Dubai, South Africa, Lesotho


Once again, to see the full photo albums for this trip, please visit: https://synapsetrading.com/travel-log/

Enjoy! 😀

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Spencer Li

Why Are More & More Singaporeans Switching from Stocks to Forex?

asd 3

Switching from Stocks to Forex

LOW VOLUME MAKES IT CHALLENGING

The volume of stocks traded on the SGX has been falling over the years.

The SGX has been plagued by weak volumes; well-known brands like Tiger Airways, OSIM, and Eu Yan Sang have left the exchange. In one article I read, a stock broker told The Straits Times that “stockbroking is looking like a sunset profession now”.

As for the number of IPOs?

Nov 2016: 1

Aug 2016: 2

Jul 2016: 6

Jun 2016: 1

May 2016: 1

Apr 2016: 1

sgxSince the start of 2016, trading volumes have been lacklustre.
Source: ChannelNewsAsia

Not only has volume been lacklustre; the Singapore Straits Times Index has been hovering sideways for most of 2016. Intra-day trading is an impossibility for many because of the huge amount of funds needed to trade stocks in and out.

SAVE MONEY 7 TIMES BY MOVING TO FOREX TRADING

$ – Save Initial ‘Tuition’ Fees

Trade small, make mistakes with small sums of money.

$$ – Save on commissions

Zero commissions, period.

$$$ – Track your stats and make changes

Use myfxbook to track your statistics, and adjust your strategy accordingly.

$$$$ – Charts are free

Pay nothing for charts, forever.

$$$$$ – Trade only when you are not working

24/7 market allows you to choose to trade only when you are free; won’t have to sacrifice your job.

$$$$$$ – Market volatility known ahead of time

Use the forex calendar to know when your forex pair will encounter volatility; no more rude news shocks.

$$$$$$$ – Accumulate expertise cheaply

No need to wait years or pay market strategists to test if your strategy works; try it out on past charts, execute it ‘live’, and see how it goes.

IT’S CRAZY; I DON’T UNDERSTAND WHY PEOPLE HATE FOREX

Some people quip that the forex market is more difficult to trade than the stock market. I beg to differ, because it is your circle of competence that determines your success, not the actual characteristics of the market.

You get to start with as little as $500.

In the Forex market, you are entitled to ‘get a feel of the game’ by risking a few dollars per trade. Most brokers allow you to trade 0.01 lots, which is $0.10 per pip on average!

The quickest way to rack up trading experience is to make many trades and check out the statistics behind your trades. After all, it’s a numbers’ game: with a properly developed trading edge, your account should have a positive expectation and profits should be the norm over the long-run.

You trade ‘live’ and get skin in the game.

There’s this huge debate about ‘live’ accounts versus demo accounts. Here’s the solution: start with a ‘live’ account right from the beginning. Get yourself into the reality of trading, risking money on a daily basis. Sooner or later you will get used to the risk that is inherent to the game.

By learning to make many decisions and experiencing all the different conditions of the market, you would become seasoned enough to trade a bigger size, and fine-tune your own trading strategy. I like what Tom Sosnoff said about learning to trade: “Trade small, trade often.”

No commission charges!

Forex has no commission charges. This may come as a shocker to the stock trader, but for forex traders it is a constant reality. This reduces the ‘tuition fees’ you need to pay to the market as a result of making trades.

Many new traders make any of the following mistakes:

  • Trading the wrong lot size (1.00 instead of 0.10, causing too big a trade size)
  • Going short instead of long
  • Entering a trade only to realize the market is closed

Yes! These mistakes may sound silly, but every trader who has had skin in the game would understand what I just said.

24/7 market; choose when you want to trade.

The great thing about Forex is that you can decide when to trade based on your schedule. That helps people who have punishing schedules: trading in the middle of the night, or during lunch, on a daily basis, works out to a trading schedule that accommodates your lifestyle needs.

 

THE SIMPLE 3 STEPS TO MITIGATE FOREX TRADING RISKS

Here are three simple steps to mitigate Forex trading risks:

  • Think in Percentages – takes the emotion out of the dollars
  • Find an Edge – only an edge gives you a profit in the long-run
  • Stick to One Style – don’t try to be everything at the start

MITIGATE FOREX TRADING RISKSToo many forex traders try to do everything at once. Focus on first becoming profitable; diversifying across trading styles can come later.

If you want to get started on forex trading, what’s stopping you? I’ve shown you 7 ways it can save you money in your trading career.

If not today, then when?

Cheers!

REFERENCES & RESEARCH SOURCES

straitstimes.com/business/companies-markets/sgx-turnover-plunges-27-to-206b-in-august
theindependent.sg/business/the-hollowing-of-the-singapore-stock-exchange-sgx/
channelnewsasia.com/news/business/singapore/sgx-reports-on-year/2406994.html
shareinvestor.com/ipo/index.html

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Spencer Li

How Much Must You Save to Have $1M at Retirement? (The Answer is Surprisingly Low!)

one million at retirement

 

These days, $1M seems to be the golden figure that everyone aims to attain before retiring. I know there is this great debate about whether $1M is enough, but hey, $1M can get you by for many, many months.

Here’s a table summarizing exactly how much you need to save (or rather, invest) every month, in order to retire with $1M. Using some formulas from my finance 101 class in university,

tableThere you go. I tabulated the figures for easy reference.

It’s one thing to know how much to save monthly, but the real challenge is to get down to doing it.

Here’s 3 tips I have to help you guys attain your own financial goals. They are simple, but you might be surprised how hard they are to actually follow-through with!

 

TIP 1: SAVE MONEY, REALLY.

Yes, save money. This is so easy to say, but difficult to do.

I remember that in my younger days, after receiving my first paycheck, I went out and quickly spent half of my salary on a ‘gift’ to myself, as a reward for seeing the first stack of cash come into my bank account. I quickly learnt that I did not actually need that gift, and that saving money was very, very difficult, especially since you know that your income is certain!

If there was one piece of advice on how to actually save money, it is this: PAY YOURSELF FIRST! It is surprisingly difficult to get yourself to do this, but you must learn to pay yourself first. Paying yourself first doesn’t mean buying something for yourself; it means moving money out from your paycheck into a savings account or investment account on a regular basis.

Perhaps its tough for the first few months, but new habits take time to form and when you actually get down to it, you see that it is a very useful habit to have. In fact, if you have children, it would be good to start teaching them this from a young age. “Pay yourself first, and then spend what you have left” is a good way to instill financial discipline in the younger generation.

Before you ask “How much do I need to save?”, why don’t we just get down to the first step, which is to actually start saving money?

Once you get in the habit of saving, it because second-nature. After doing so for some time, we can move on to the next tip:

TIP 2: BUILD A TRULY DIVERSIFIED PORTFOLIO

Generally speaking, there are two kinds of investing strategies:

FAST money: trading income, bringing in quick gains.

Trading is the way to quickly build up a portfolio and invest in dividend-yielding counters or REITs. Once you’ve stuck to a simple trading strategy, repeating it over time is bound to yield significant profits, much faster than you would in a fixed deposit or by holding the stock index for 5-10 years.

SLOW money: passive income, bringing in smaller but consistent gains.

For those with lots of money, they can allocate much of their portfolio to more stable assets, like dividend stocks, the stock index (it brings a dividend as well!), or other longer-term bonds.

Most people want to use fast money  all through their life, but it is unrealistic. As we age, we have less and less energy and time to continually engage the markets, so the goal is always to have a large war chest that brings in true passive income.

You might be surprised how few people understand the true meaning of a portfolio. Sometimes, the word ‘portfolio’ brings in the idea that you can only buy 5-10 stocks and hold them over 20-30 years. I beg to differ; in a portfolio, one must be truly diversified across…

  • All asset classes (forex, bonds, stocks, REITs, ETFs, commodities)
  • Time horizons (fixed deposits / buy-and-hold dividend stocks VS trading income)

Learning to do so requires some dedication and bumping your head in the wrong places at first. That’s why I always recommend that beginners take up forex trading; they’ll be exposed to market volatility, intra-day and longer-term trading, and also different asset classes by trading oil, gold, wheat, the stock indices, and bonds. Furthermore, you need as little as $500 to start with, and the cost of failure is very low.

 

TIP 3: STAY CONSISTENT

It is remarkably difficult to do something simple over and over again.

Want to lose weight? Exercise and eat healthy. But how many people actually keep to this?

Want to become better at socialising? Spend more time with people rather than with your phone or computer. But how many people actually keep to this?

Want to learn to trade? Stick to 1-2 trade setups, and repeat these trades week after week. But how many people actually keep to this?

It is very, very difficult to do what is simple and boring. In fact, it is the boredom that kills most traders!

One thing that experienced traders fail to do that knocks them out of the game is this: they fail to keep reading, reflecting, and honing their craft.

Continuous learning has to be part of your investing plan. After all, most people only want to invest money, but don’t want to invest the time to learn how to be profitable.

How much returns is good returns?

Well, that depends on your goals. There is a trading strategy for every level of returns. A conservative 10-20% returns as a trader is possible and you generally take a lot less risk than someone who wants 100-200% returns a year.

Depending on when you want to retire, you need to find out how much % returns you need a year, and look for a strategy that gets you there.

 

IT’S BORING, BUT YOU NEED TO TRACK YOUR PROGRESS!

how-muchWith a Google search, I found a useful table to track your progress, credits to businessinsider.sg! Source: BusinessInsider.sg

Suppose you want to save $1M, it’s extremely important to track if you are on target, and see if you need to allocate more funds to fast money or slow money.

If you are proficient with MS Excel, you should be able to come up with a table for your income, expenses, savings, investment returns, and projected net worth by whatever year that you are aiming to retire by.

I hope this article brings you to your feet and gets you started on your quest for financial freedom. Maybe for you, the first step is to actually start saving money! Starting where you are is all you need to do. With every step you take, you’ll be one step closer to your goals.

Cheers! 😀

RESEARCH SOURCES & REFERENCES

businessinsider.sg/compound-interest-monthly-investment-2014-3/
businessinsider.com/retirement-savings-guide-2014-3?_ga=1.199140719.1988080035.1478087095

 

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Spencer Li

Top 3 Reasons Why You Should Start Investing in 2017

Copy of Copy of Not allthose who wanderare lost

copy-of-copy-of-not-allthose-who-wanderare-lost

Brexit, Trump, Italy, asset bubbles all over the world… you name it, there’s probably some financial market jitters that keeps most people out of the world of investments.

On the flipside, the financial world often quips about some investment that has made xx% over a certain period of time, trying to entice visitors with a glimpse of the profits possible for anyone. In the world of investing, it is easy to find spectacular returns on hindsight, and salesmen go through great lengths to market what has already happened.

As traders, we live in a constant state of uncertainty. Every trade we make has the possibility of going wrong, and this is taken into account when a decision is made. It is the knowledge of this that gives power to a trader; if he can understand the math behind his investment decision, he can have a positive expectation and a positive traders’ equation.

There are three main reasons why trading is even more attractive these days. Indeed, with advanced technology, there has never been a better time to step into the world of finance, and grab a golden egg while you still can.

GOLDEN EGG 1: TRADING GIVES A HIGHER INTEREST RATE THAN BANKS

fdThe best you can get on a fixed deposit is 0.35% a year in Singapore, as at December 2016.
Source: moneysmart.sg

While inflation is a constant enemy for our savings accounts, most people do not know what to do to combat inflation. The most common quick-fix is to work harder and earn more money. While that does feed us and our families for some time, the need to build a war chest for emergencies becomes more and more real.

 

How much can you make from trading? Institutional traders bring in a success rate anywhere from 30%-70%. Why is this so?

The greatest insight into the markets that can make you profitable is this: 90% of the time, the odds are 50-50, while 10% of the time, the odds swing 60-40 (slightly in your favor).

That’s right. While most of the time, markets are 50-50, it is those brief moments when the market gives some opportunity, and prices quickly move to take advantage of this opportunity. That means that if you were to buy or sell randomly, you already have a 50% chance of success!

Another insight to know is that a high success rate (hit-rate) brings a lower profit target, while a low success rate brings a higher profit target.

What do I mean by this? Institutions trade using a combination of low-probability and high-probability trades.

Example: 40% (low) success rate, win = +2%, lose = -1%.”

low

In this case, if you were to make 100 of such low-probability trades, you would make +80% on winning trades and -60% on losing trades, bringing a 20% return on capital.

Example 2: 75% (high) success rate, win = +0.5%, lose = -1%

high

In this case, if you made 100 high-probability trades, you made 37.5% on winning trades and -25% on losing trades, bringing +12.5% return on capital.

It is impossible for the market to give high-probability trades with a high profit potential. This would be quickly detected by institutional traders, who have mathematicians, PhD staff, and computer science experts who can quickly make adjustments and profit from it. With hundreds of millions of dollars at stake, these people would do all they can to bring profits for their firm.

 

That is why if anyone quips that they have a 80-90% success rate, they are probably having many small wins but a few gigantic losses. If you don’t believe me, try trading forex and planting random trades with low profit potential and high loss potential. The numbers indeed prove to be true!

That is also why it is important to understand the traders’ equation. With a reasonable success rate and an appropriate win-loss ratio (or risk-reward ratio, RRR), you would be profitable over the long-run.

I have had days where I ran 7-8 trading losses in a row, but because I trusted in the probabilities, the next 3-4 trades ended up profitable, as long as I stuck to my trade setups and didn’t let the emotions get the better of me.

GOLDEN EGG 2: TRADING DOES NOT REQUIRE LOTS OF CAPITAL

If you have $500 to invest: trade forex.

In the Forex market, you are entitled to ‘get a feel of the game’ by risking a few dollars per trade. By trading the smallest lot size (0.01 lots), you can learn to make a few dollars here, lose a few dollars there, and rack up trading experience and learn to trade ‘live’ without incurring hefty losses.

By learning to make many decisions and experiencing all the different conditions of the market, you would become seasoned enough to trade a bigger size, and fine-tune your own trading strategy.

Many traders discover they have certain characteristics about themselves that hinder success. In trading a ‘live’ account with a small sum of money, they are putting in some skin in the game, and getting used to the ups and downs of their account.

The best part about forex is that there are no commission charges. The broker makes money from the bid-ask spread, which is the difference between the buy/sell price, and most brokers charge reasonable spreads, allowing you to trade with almost negligible transaction cost.

If you have $3000 to invest: explore stock CFDs.

Stock CFDs have low commissions and can be bought in small quantities – a few thousand dollars can allow you to have a portfolio of 5-10 stock positions.

For people with less time and more money, stock CFDs can be a great way to learn to deal with commissions, spreads, fee structures, and the whims and fancies of the stock market.

The stock market is only open during working hours, unlike the forex market. Someone who is interested to take longer-term positions may be open to trading stock CFDs, risking small amounts of money, and yet racking up trading experience.

Some people quip that the forex market is more difficult to trade than the stock market. I beg to differ, because it is your circle of competence that determines your success, not the actual characteristics of the market.

If I were to ask you to drive a Formula 1 race car, you probably would kill yourself within the next few hours or so. However, if you were progressively taught how to drive the race car, it doesn’t become dangerous, and because of the progressive nature of your learning, the high speeds don’t come as a shock to you.

f1Driving this car is dangerous, only if you are not trained.
Source: wallscorner.com

Many people get shocked at the speed by which forex markets move during the Non-Farm Payroll Announcements and FOMC Interest Rate Announcements; prices can move 10-50 times faster than normal during those crazy periods! However, with practice, these sessions can become a profitable time for traders with experience and proper risk management.

If you have $10,000 to invest: trade everything.

People with more money have the luxury of trading a combination of stocks, forex, commodity, bonds, and index trades. These can be accessed through any decent forex broker, and you’ll be surprised to find that most forex brokers let you trade forex, oil, gold, the Dow Jones Index, the S&P, the bond markets, wheat, corn, natural gas, and more. These of course come with higher margin requirements, but exploring all the asset classes makes you a seasoned, well-rounded investor that can take any market condition.

Sideways in the forex market? Maybe there is a trending opportunity in the oil market. There’s always something to trade if you have the experience and know where to look.

However, in my opinion, the greatest investment is Golden Egg 3.

GOLDEN EGG 3: TRADING BOOKS ARE CHEAP AND EASY TO FIND

John Murphy: Technical Analysis of the Financial Markets. One of the great trading classics that builds a strong foundation.

John Murphy’s book on technical analysis reveals the fundamental nature of financial markets. Prices move in patterns and cycles, and understanding history helps you to cope with what is to come.

In my trading journey, I’ve read more than 200 books, and found only about 11 of them that are useful in my trading career. These books were either borrowed from the library, or bought only for $30-$50 a book, which is a very good price (since stock commissions can be $15-$25 already!).

Buying a few good trading books can completely change your destiny.

If you are starting out, why not invest in 3-5 good trading books, before getting your hands wet in the financial markets? These books would build a strong foundation, and you would start off with a better understanding of why things happen.

bookSome of the more famous online bookstores.
Source: Company websites

Amazon.com and bookdepository.com provide great options and they ship almost anywhere in the world. Personally, I found that bookdepository has the more exotic books, but it is a little pricey (yet still worth it since you can’t find the books easily!)

Second-hand books: Carousell if you live in Singapore! If you’re lucky you can find good books at a discounted price. Even though the books may be a little dusty and yellowed, it’s the content that you want to really absorb. You can always find what you want if you search hard enough!

TRADING & INVESTING EDUCATION IS WITHIN OUR GRASP

If you are still thinking about it, here’s why you should pick up investing education:

  • Historical chart data is free (we used to need to pay in the 1990s and 2000s)
  • Free resources are available
  • Books are cheap and easy to find
  • Starting cost is as low as $500
  • Cost of failure is low
  • Experience can be racked up with very little capital
  • There is a market for every type of investor

And most of all, it can bring higher returns in the long-run than placing your capital in the bank account. Sure, you might risk losing a couple of dollars at the start, but the cost of ignorance is a lot higher when compounded over the next 5, 10, or 20 years!

Wishing you all the best in your trading journey, and I do hope this article serves as a pump to start you on your quest for investment expertise!

Cheers!

 

RESEARCH SOURCES & REFERENCES

http://www.moneysmart.sg/fixed-deposit
http://www.lifehack.org/articles/money/15-best-online-bookstores-for-cheap-new-and-used-books.html

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