Forecasts for 2014
Well, it’s that time of year again. The time I traditionally throw a cat amongst the pigeons to get everyone to think carefully about what they are doing and to question whether they should continue with it next year. This year, I have deliberately fired up the ether with a claim that a particular stream of charting or technical analysis is rubbish… Let’s see whether anyone can conjure up evidence that ‘support’ and ‘resistance’ stands up to the scrutiny of mathematical and statistical evaluation.
It’s also the time of the year fundamental analysts submit their own forecasts for the coming year for scrutiny. Publishing an outlook statement on the market is a no-win bet and so it’s a wager we won’t take. In any event we have no way of being able to reliably predict the short-term direction of the market when an infinite number of unpredictable scenarios could transpire to render any forecast useless.
Looking across the Pacific, however, Wall Street analysts have no hesitation in making bold and sweeping prognostications about where the market will be next year. And while it’s true that a great deal of fundamental, macro and micro economic analysis has been conducted to arrive at those forecasts, their own track records suggest much of the labour could have been applied to more meaningful tasks.
Given the human inability to forecast turning points, however, it should come as no surprise that a happy band of fortune tellers believe we will see the gains of 2013 extended.
Among all asset classes, stock are the preferred investment choice for 2014. Here are some of the quotes we have seen online and amid the research we receive from all of the top brokers and investment banks:
We continue to recommend overweight allocations to global equities relative to other asset classes. – Citi
Our strategic allocation remains equities over bonds, and corporate bonds over government bonds. The global expansion will remain intact per our Economics team’s baseline, and equities and corporate bonds are not overvalued, either outright or relative to government bonds. – Morgan Stanley
Our base case for 2014 is further double-digit returns in equities. – Credit Suisse
Over the years, our strategy has made good use of both relative value and momentum. This keeps us quite long equities, where strong price momentum has in our mind only made stocks less cheap but not yet expensive against their main alternatives. – JP Morgan
There is clearly bullishness among the 2014 forecasts and one wonders whether the market will do what is necessary to ensure the majority are wrong again. Only time will tell.
For what it’s worth, we believe that, having looked at the intrinsic values of every stock, the Australian market is on the slightly expensive side of fair value. Amongst the large caps, there are no companies that currently meet all of our criteria. Calling the market expensive however is not a forecast about its direction. Aggregate market valuations could become more expensive as easily as less so, but in the past when value has been absent, we have seen the market fall.
Let’s see what 2014 brings.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Michael Wang
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I doubt the benefit of technical analysis to the flourish of the economy and the strengthening of the country. Finance should be channeled to support the functional and efficient businesses and improve the country value therefore living standards. Technical analysis can be utilized as a tool to collect scattered and hidden scarce resources.
Sue
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You should see the recommendations, I mean “stocking fillers”, received in a newsletter this week. They have no idea of the risks I’m sure.
Roger Montgomery
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I didin’t realise one could fill stockings with investments…
Robert Pearson
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To quote from a mathematically oriented paper on predicting stock prices.
The mathematics of predicting stock prices ‘is the mathematics of lemmings’.
Technical analysis can be seen as looking at the immediate past behaviour of the lemmings and predicting what they will do in the future. Proponents thus try to buy when the rest of the lemmings want to buy, then sell before the rest of the lemmings realise what is occurring and sell. This of course fails in cases like the ‘tech wreck’, the GFC etc.
References
Edgar E Peters Fractal Market Analysis : Applying Chaos Theory To Investment. Wiley 1992.
R. A Pearson. Tree Structures for Predicting Stock Price Behaviour presented at CTAC. -not available in a journal.
R. A. Pearson 2000 How to gain?/lose? on the stock market – datamining the ASX, pages 237-242 AISAT 2000, ed V Karri and M Negevisky,
Roger Montgomery
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Thanks Robert.
Yavuz Atasoy
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Hi Roger,
I asked this question before, but it seems it was either ignored or you have not had the time to answer.
Regards,
Yavuz
Roger Montgomery
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Fell free to give me or our CEO David Buckland or head of research, Tim Kelley a call Yavuz…would be delighted to chat.
Kelvin Ng
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Hi Roger, does QBE now meet your criteria after today’s fall? Its probably cheap, but management’s credibility has been shot and I guess it depends on whether there’ll be further write downs on its US division. Would be interested in your thoughts.
Kelvin
Dave the Wave
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Have any of those investment banks and brokers heard of rising bond yields?
Adam Novek
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Hi Roger,
This article has been very interesting. Does any sought of technical analysis go into you timing investments? The reason I ask is that just because a share is cheap to buy doesn’t guarantee the price will increase as soon as you buy it. This could mean that you can lose and continue losing before any turn around in the market. The older I get the more I feel that timing is such a big deal in the market.
Roger Montgomery
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In fact Adam, I can guarantee that just because a share is cheap it won’t go up. Valuing a company is not the same as predicting the direction of its shares. The issue with the common methods for timing is that when I last looked a share price trading through resistance or support didn’t change the odds of its direction the next day, week or month either.
Adam Novek
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Yeah you pose a very good point, but so does the comment below me. I think volume/turnover and the rate of change in these can indicate momentum and weaknesses in the market that can be used to anticipate price directions.This is about the only useful thing I have gotten out of technical analysis. Someone I know used this technique called pitchforking for like a week before they found it was wasting time and money. The stock market becomes a slippery dip into human psychology when we start focusing on technical analysis too much and it’s really hard to read people’s minds even with sophisticated charting believe me.
Michael Shapiro
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Here is my 2 cents. I see a technical analysis as complementary to fundamental analysis. Technical analysis is only designed for short term trading. The most valuable aspects of technical analysis in my view is not support and resistance, but trend analysis. If a share is to make a transition from up trend to sideways or to down trend, then the trend line(s) must be broken. You can look at it as an early warning signal. Trends take time to develop and end, because the economics laws of supply and demand work differently for financial instruments, compared to consumption goods, primarily because of leverage involved. Paradoxically higher prices can create higher demand, and vise verse, lower prices can add to supply as far as financial instruments are concerned. For that reason, the trends become more powerful towards the very end when the pain of being “wrong” is the strongest. That’s why momentum buying and selling can be the fastest and most profitable transactions conducted at most irrational price points when looked at in the long run. Most speculators and investors alike try to make money by betting that current market pricing will change in the future. At the end of the day it’s the market participants that determine current prices. The role of technical analysis is to mathematically assess and quantify the mass behavior of market participants and that is the value of it. The fundamental analysis is valuable as a long term check on market craziness.
Roger Montgomery
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I thinks that could be right Michael, provided you have a sound framework for both and a framework that has been rigorously tested and proven to work.