Your most important quarter

Your most important quarter

18 February 2019 from Mikael Syding

Did you keep to the strategy in Q4?

Did you follow your strategy during the reporting period or did you let yourself be impulse controlled? There is nothing to be beaten over. Our evolutionary background has not prepared us for the strange situation that stock trading entails.

Actually, the task is quite simple. Determine in advance which shares you should follow in extra carefully for a few weeks before and after the reporting date. Do not choose shares that report too close to each other - unless that happens to be your strategy and you know exactly what you are doing. Prepare your list of variables that will guide your decisions during these weeks. You know, the list that you gradually refined during your time on the stock market by testing what should logically work out and excluding what empirically did not.

Impulse on impulse

Here's how it looks if you do everything wrong: the dividend became higher than any kind of public expectations - a forecast that you didn't know until after the dividend proposal became public. You then bought spontaneously on the opening, in order to be on the rise that you thought should follow. But soon the course turned down and you then followed an impulse to sell with loss, based on the fact that "you did not understand why it fell and therefore did best in reversing your impulse purchase". Later in the day, the course turned up and closed considerably on the plus. However, you had locked in a loss with your two impulse transactions that lacked a decision basis.

You did the right thing - really wrong

When you read news and comments on social media in the evening, the message was that "the course rose after a decision on higher dividends than expected". Only then did you have time to update your models and realized that you had actually expected even lower dividends than the average forecast. In addition, you found that since the dividend was your most important parameter, you would actually have decided to buy quite a lot of shares if it became higher than that.

Throw good money after bad

Full of revenge slush, then you do one wrong deal after the other for the rest of the period, much because you temporarily changed your strategy after the first miss, without being able to adjust your information inferiority.

The above can be based on all possible basically sound decision variables such as profit measures, growth measures, number of customers, deviations from your own expectations, or official average forecasts, or the company's guidance, or differences between said variables. E.g. you could have a plan for how you should deal with EBITDA is higher than you expected but lower than the average forecast and the course starts down during the amateur hour.

Smart Money Index

Here it may be worth pointing out that the opening trade on the stock exchange is called Stupid Money and the closing trade for Smart Money. This is partly due to the fact that impulse-controlled amateurs react to news and reports immediately after opening, while icy pros read the current situation all day and make thoughtful and strategic decisions that they can live with during the night. A general tip is, moreover, to follow the index of relative trading volumes and market direction during Stupid vs. Smart hour to get an idea of the market "wants" up or down.

On January 2, OMX traded at its lowest in 1378.2 and rose to a maximum of 1584.5 on February 15, ie the index rose by 15 percent below what can be called the report period. The month before the reporting period, OMX fell by 11 percent. These are remarkable movements and an extreme reversal. What was the cause?

Macro-controlled stock exchange was the key

A lot of reports were clearly stronger than expected, but there were some weaknesses as well. So on the whole, the distribution was about as it usually does. The large movements were mainly due to the fact that the stocks and industries that fell most prior to the reports also rose the most as long as the reports did not contain any significant disappointments. In short, the stock market was therefore almost entirely macro-controlled.

Dividends central

China's record-high credit volumes and the US central bank's austerity pace were far more important than details such as sales, margins, tied-up capital and dividends. By the way, stroking that last one, for retained or raised dividends seemed to be more important than if the company could actually afford the dividend.

If you had prepared yourself for the reports analyzing the macroeconomic situation - "QT and concern over Q4 drives down cyclical stocks", as well as selected which shares and parameters would be the basis for decision-making - eg. gains, margins and price movements - so you could quite early note that especially cyclical stocks showed positive trends early on only on the absence of negative news. Then you could have adjusted your bias during the period to rather free than trap, keep overweight cyclically in front of defensive among your selected shares, and to buy more of companies that published decent fundamentals if they fell during Amateur Hour.

How to prepare for the next period?

Getinge, Swedish Match, Electrolux, Boliden, Atlas Copco, Sandvik, Assa, SCA, Volvo, SKF and Skanska grew significantly. I understand if it hurts to even look at them if you were one of those who sold during the fall in December or in connection with the report. It's extra hard if you bought Telia instead. But now it is important to take a new hold and make use of the fact that the stock market is macro-controlled and many market participants are impulse-controlled - instead of being exploited.

Start by assuming if you think that the strongest start of the stock exchange in 30 years will be followed by more upturn, or if it is rather that the pattern from 2018 and 2019 with rebounds and mean reversion will continue. The trade war between the United States and China does not seem to be an immediate and final solution. The same goes for the question of whether the Fed should tighten or stimulate, and if the negative surprises on the macro front are over or soon switch to the positive direction (which can trigger QT in front of the QE).

Make sure you form a clear view of both your overall view of the economy, the responsiveness of politicians and the stock market's response. Then put your selected companies in context, given this macro view, and measure how they and their industry colleagues respond to and in the beginning of the next reporting period. Note that in practice it will start in March in just a few weeks.

Your most important reporting period ever

Q1 2019 may very well prove to be your most important reporting period so far, just as Q1 2001 and Q1 2008 became mine, so be sure to be both quantitatively and mentally prepared, so you can shop strategically instead of emotionally controlled, and only on the variables and levels. you decided in advance.

Nordic Industry 4.0

One tip for the period is to take a look at the index Nordic Industry 4.0 and the related instruments that Vontobel provides. The name despite it is not so much IT or cool future company with. Instead, you get exposure to just the kind of cyclical companies that fell in 2018 and especially in December 2018, and have risen sharply so far this year. NI 4.0 can therefore be used as a hedge against or reinforcement of exposure to Nordic engineering companies.

Among other things included Veoneer, Elisa, ABB, Vestas, Tomra, Sandvik, Netcompany, Konecranes, Nokia, Wärtsilä, Mycronic, Hexagon and Atlas Copco, but I was going to write more about next time just before the Q1 season

@Mikael Syding

Important legal information

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This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capitalprotected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

26/11/2022 10:59:54


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