Part 1 of this Blog Series was scribbled about a week ago - I recommend reading that and understanding it before trying to get your head around this one - it’s an extremely important topic but not particularly easy to get a grip of.
How to Interpret the P/E Ratio
Right, now we have got to the critical bit. Calculating a P/E Ratio (remember, I prefer the Forward P/E Ratio) is one thing, but it is not much use if you have no framework and knowledge to put that Number into context. The following list should help with that interpretation (well, that‘s the plan anyway - you may need to read it a few times and perhaps makes notes - this is extremely important):
I am listening to the Foo Fighters* ‘Wasting Light’ as I work on this, so it might be a bit Rockier and Punchier than normal…..
As I keep saying, we are fast approaching the Autumn and particularly the month of September which has historically been the worst performing month of the year for the FTSE100 (and by extension most Global Major Indexes as correlations are significant). With this in mind, the Price Action last week was quite interesting and I was watching with particular focus the Weekly Candles and the Monthly Candles on all Major Indexes - and it seems to me that they are all giving Reversal Signals - so a Sell-off could be on the way. I will dig into these Charts in a bit and I will look at the History around September. In addition, the VIX Index has had a particular fascination for me and this could be a big help in understanding the likely direction for US Markets in coming weeks.
Don’t panic, I haven’t morphed into Tony Bliar; although I have been drinking the odd beer or three tonight and maybe we could all do with some “Education, Education, Education“. I am very aware that in recent weeks I have been nonchalantly discussing and tweetering about ‘Valuations’ being on the high side and I often bandy this term around, but I perhaps haven’t really defined in detail what it actually means.
I am pretty sure that I have regularly referred to P/E Ratios (Price/Earnings Ratios) and Valuations in various Blogs etc. but I don’t recall ever doing a Blog which is pretty much dedicated to the P/E Ratio and what it means and how to interpret it. It has certainly come to something when I have bashed out so many Blogs that I am starting to forget which ones I have written and which ones I haven’t - throw in some Old Speckled Hen and a sniff of Alzheimers and I guess it’s not such a huge surprise (if you go to the ‘Useful Links’ page and scroll down, you will find the Full List of blogs published up to now and I strongly suggest that people who are new to the whole WD malarkey have a nose through - there is a lot of useful stuff in there I believe.)
We are getting near Autumn now and the traditionally weak month of September (historically the worst month of the year). I am writing this ‘Intro’ after I have actually looked at all the Charts and the thing that stands out is that although there are hints that they are stretched to the upside, there is no really clear evidence that we will turn down yet - maybe if that does happen, it will be more clear in September.
I did however notice that Oil looks a bit toppy short term - if this turns down, it might drag the FTSE100 down with it.
THIS IS NOT A TIP OR RECOMMENDATION. I AM NOT A TIPSTER. PLEASE DO YOUR OWN RESEARCH. PLEASE READ THE DISCLAIMER ON THE HOME PAGE OF MY WEBSITE. IF YOU COPY MY TRADES, YOU WILL PROBABLY LOSE MONEY COS SADLY I DON‘T HAVE PERFECT ABILITY TO PREDICT THE FUTURE, AND BEAR IN MIND THAT I AM A LONG TERM INVESTOR USING MANY RISK MANAGEMENT TECHNIQUES. UTW IS A SMALL HIGH RISK COMPANY AND NOT ONE TO PUT YOUR LIFE SAVINGS IN !!
I must say it is really nice to be writing this blog. It seems that recently I have barely done any blogs specific to individual companies and it is really refreshing to have to get my Research & Analysis head on and get stuck into thinking hard about a business.
Last week we saw more rises on the FTSE100 and European Indexes although the US ones didn’t really do a lot. Markets in general look very toppy to me and I have big Short Positions in place to hedge my Long Portfolio of Stocks as we come into the usually difficult Autumn period - September has a reputation for being the worst month and we are not far away now.
According to the UK Stockmarket Almanac 2016, for the coming Week (w/c 15th August 2016), the FTSE100 tends to be up for 65% of Years with a Positive Return of 0.2%. So the backdrop is favourable. It is worth noting also that the following week tends to be strong.
Is it possible to be too cautious? I think I am learning the hard way this year that being too cautious is very possible and can be expensive. I have had a really tough year with Returns (or rather, lack of) and although a big chunk of this has been down to a sucession of Profit Warnings from big Positions, another aspect has been down to me taking a very cautious stance this year. It has hurt in 2 ways - the most obvious is the drag I have suffered from large Short Positions and the other impact comes from me failing to “Buy the Dips” when Markets were low (although at the Brexit Vote Lows back in June I did close half my Shorts which was in effect the same as Buying the Market in a big way).
This is a bit of a cathartic blog for me, cleansing the WheelieSoul (no, not the WheelieAr**hole, that’s a different part of the WheelieAnatomy and best avoided…..)
I am particularly interested in the Index Charts this week because with Autumn ahead we are entering into probably the most difficult period for the year when big Sell-offs can often happen. September is the worst Month and October has a reputation for nasty falls like the 1987 Crash - so for me Caution is paramount.
Last week the Markets started to dip so I increased my FTSE100 Shorts and Nasdaq100 Shorts, but later in the week we had the Bank of England Stimulus and then a strong US Non-Farm Payrolls Number which pushed the Markets up. The FTSE100 is still well under strong Resistance and I am not too concerned about that one but the Nasdaq 100 broke-out to a New All Time High so I am thinking of reducing the Short - however, it is possible that this is a knee-jerk response to the News and we could fall back this week - so I am making no snap-decisions and I will review the situation on Monday night. My Short Positions are very large and probably a little over-sized really - this is fine if Markets are about to drop, but if they keep going up it will cause me trouble - so I need to monitor carefully.
As usual, let’s start off with the History Bit………
I do worry that people are beginning to get the impression this is a Technical Analysis website - I assure you this is not the case, I purely use TA as an aid to my far more crucial Fundamental Analysis !!
Anyway, the point of this Blog is that there was some chit chat on Twitter recently about investing in Miners and the Mining Sector. I am no fan of the AIM Tiddlers as you probably know by now (if you want to waste Money, give it to me please - I might even say “thank you very much” which is more than an AIM Exploration Stock will offer), however, I don’t have much Mining Exposure apart from a small Glencore GLEN position and a load of Golden Prospect GPM which is sort of a bit different as it is really a Hedging Play on Gold.
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