Investment strategies for volatile global markets

The recent global economic recession and meltdown of financial markets did many things, not the least of which was to test some of the conventional principles about investing.

The recent global economic recession and meltdown of financial markets did many things, not the least of which was to test some of the conventional principles about investing.

In his book, Reading Minds and Markets, Minimizing Risk and Maximizing Returns in a Volatile Global Marketplace, investment executive Jack Ablin says investing in volatile global markets demands a global macro investment strategy based on metrics, or tools, that help investors understand what is happening in economies and markets so they can shift their money to more promising industry groups, sectors or asset classes at the appropriate time.

Ablin says traditional asset and market diversification principles failed during the recent financial crises. All asset classes and global markets plummeted, and even gold, often considered an investment haven in troubled times, fell during the height of the crisis.

“Macro investing is all about finding a way to evaluate markets rather than focusing just on individual stocks,” says Ablin, Chief Investment Officer of Harris Private Bank in Chicago. “Investors need to learn how to read the market’s mind and figure out where the risks and rewards are most acute at any given point in time.”

Patricia Lovett-Reid, Senior Vice President of TD Waterhouse, says that while diversified investors did not escape the financial downturn, they probably suffered less than those who were not as diversified.

“Investors who were diversified did fare better because their losses were held in check,” Lovett-Reid says. “It’s a tried and true concept that will get you through the bad times.”

The methodology for global macro investing involves using metrics to study and analyse five main factors – market momentum, the economy, liquidity, psychology and valuation fundamentals.

By studying market momentum, or trends, investors can identify appropriate market entry and exit points.

The most important momentum metric is the 200-day moving average. This is calculated by determining an average of all the prices for a stock, bond or index for 200 trading days in row, which is roughly equivalent to a full calendar year of trading days.

“This is generally viewed as the dividing line that tells you when a stock or index looks healthy,” Ablin says. “As long as the index level remains above its 200-day moving average, the bullish trend is intact. When it falls below that line, it serves as an equally reliable sell indicator.”

For example, someone who began investing in December, 1980 and bought stock on the Dow Jones Index whenever it traded one percentage point above its 200-day moving average and sold when it dipped one percentage point below (and put the proceeds into securities averaging four per cent a year), would have had $1,681 for every $100 invested by December, 2008, compared to $890 for every $100 invested by the buy and hold investor.

An important aspect of momentum is knowing the breadth of a market, or how many stocks or sectors are participating in a movement.

One of the best measures of market breadth is the advance/decline (A/D) ratio, which compares the number of stocks whose prices are advancing and the number that are declining. Values higher than one show that more issues are advancing than declining while values between 0 and 1 show that more issues are declining than advancing.

“This momentum metric will tell you the degree to which investors are convinced that the trend will last,” Ablin notes. “It can be applied to any asset class, including commodities (and can) be a way to determine whether and when to pull money out of stocks, bonds or other markets and park it in cash.”

The goal of momentum metrics such as the 200-day moving average and the A/D ratio, which are available on many online brokerage sites and through public sites such as Bloomberg and Yahoo finance, is to help investors you make macro-level investment decisions. “If you know how and when to turn to momentum indicators, you can look for early signs of changing market trends,” Ablin says.

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be contacted at boggsyourmoney@rogers.com.

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