NO sooner had the ink dried on last month’s Investment Club report, in which we expressed no confidence in the Chancellor, than the gilts market dropped precipitously.
While the club backed out of gilts before the main fall, the damage had already been done, giving us a terrible end to 2012. The club’s unit price plummeted 11p to £3.14, due almost entirely to the fire sale of its gilt holdings.
Therefore, the club has to come up with a completely new strategy to compete in the brave new world we find ourselves. One such idea is to buy £5,000 tranches of shares, but use the FTSE 100 and the FTSE 250 mid cap indices as buy and sell timing indicators. For instance, we buy one or two shares from the FTSE 100, such as Aviva and Vodafone. We then hold these shares until the club’s paper and pencil (pap) analysis alerts us to the FTSE becoming over-bought. At that point we sell the shares in the hopes of buying them back cheaper once the FTSE cools down a bit.
To engage this plan, we first have to decide in which direction the FTSE 100 is going to move.
After an extended consolidation period between April 2010 and October 2011, the FTSE has cracked above its 8 February, 2011 high of 5,091.33. Does this mean it is on its way up? Pap analysis certainly thinks so, and does not see any real impediment to FTSE’s progress until it attains the level of 6,732.4, last reached on 15 June, 2007. In this area there is a lot of price action going on all the way back to 30 December, 1999’s all-time high for the FTSE of 6,930.2.
The main threat that to the FTSE 100 not fulfilling this target is an unexpected bankruptcy of a large company or bank.
This is still possible in spite of the vast sums of money that have been pumped into the UK economy because income is still being sucked out of the economy at a steady trickle.
For instance, in the UK, family tax credits are being stopped for families earning more than £40,000, a 1 per cent cap on benefits has just been voted in, and wage settlements are below inflation. While the loss of income to the economy from any one of these sources does not deliver a major financial blow, it eats away at our economic foundations: witness the recent demise of Comet and Jessops.
However, countering this risk to financial markets is a lot of cash built up during the protracted consolidation phase of 2010/11. This money is waiting to enter the equity market either from savings or switching out of cash equivalent investments.
This month, therefore, we are going to use all the funds released from dumping gilts holdings to purchase a selection of shares in £5,000 lots. Let us hope that the club’s share selection will help it have a better start to the new year than it had end to the old one.
