As with anything we try to do in trading, we attempt to buy the strongest looking prospect and sell the weakest looking prospect. In pairs trading however, we do the above on two highly correlated securities.
The idea is to look within sectors, correlated currency crosses, even correlated commodities, and identify the best looking prospect for a long and the best looking prospect for a short. Then we will look to execute a long and short trade respectively at the same time.
The idea is that each trade will provide a natural hedge against the other. We are not so much interested in the performance of each position in isolation, but rather the performance of each position as part of a single, combined trade.
Let’s look at an example.
One of the best ways to do a pairs trade is to look at a specific sector in the market, let’s say the Healthcare Sector (XHJ). We note two stocks in the XHJ that are experiencing very different fortunes in the market.
CSL Ltd (CSL) is in a nice uptrend, whilst Cochlear (COH has endured a rough time over the past five months.
This would be an option for a “pairs trade”. We would look to go long the stronger stock (CSL) and simultaneously go short the weaker stock (COH).
To read more visit Carl at the Australian Stock Report How To Buy Shares blog
October 15, 2013
October 1, 2013
Buy, Sell, Hold Recommendations 29/9/2013
As featured in the Herald Sun on September 29th 2013, here are the latest buy, sell and hold recommendations from Geoff Saffer Equity Analyst & Educational Facilitator at the Australian Stock Report.
Australian Shares To Buy
Lend Lease (LLC) – Expect LLC to build on solid FY13 performance, underpinned by strong project pipeline, infrastructure activity. Balance sheet allows for possible acquisitions.
Empired Ltd (EPD) – Expanding IT Services company looks set to continue fast-paced growth on back of recent strategic acquisition. Expect earnings to almost double in FY14.
Australian Shares To Hold
Medusa Mining (MML) – We remain wary of the gold sector, but MML’s production is now ramping up, costs remain extremely low and valuation is more appealing than its peers. Australian
Agricultural (AAC) – Has just undertaken a massive capital raising, shoring up its balance sheet. Needs to successfully shift sales overseas to achieve higher beef prices.
Australian Shares To Sell
SCA Property (SCP) – Property trust offers solid yield and surety of Woolworths tenancy. But more than offset by lack of growth and underlying weakness in specialty store occupancy.
Oroton Group (ORL) – Has some growth prospects, but lucrative Ralph Lauren contract has ended, highly-regarded CEO has left and stock trades at too high a premium to sector.
Australian Shares To Buy
Lend Lease (LLC) – Expect LLC to build on solid FY13 performance, underpinned by strong project pipeline, infrastructure activity. Balance sheet allows for possible acquisitions.
Empired Ltd (EPD) – Expanding IT Services company looks set to continue fast-paced growth on back of recent strategic acquisition. Expect earnings to almost double in FY14.
Australian Shares To Hold
Medusa Mining (MML) – We remain wary of the gold sector, but MML’s production is now ramping up, costs remain extremely low and valuation is more appealing than its peers. Australian
Agricultural (AAC) – Has just undertaken a massive capital raising, shoring up its balance sheet. Needs to successfully shift sales overseas to achieve higher beef prices.
Australian Shares To Sell
SCA Property (SCP) – Property trust offers solid yield and surety of Woolworths tenancy. But more than offset by lack of growth and underlying weakness in specialty store occupancy.
Oroton Group (ORL) – Has some growth prospects, but lucrative Ralph Lauren contract has ended, highly-regarded CEO has left and stock trades at too high a premium to sector.
September 16, 2013
Buy, Sell, Hold Recommendations – Herald Sun 8/9/2013
As featured in the Herald Sun on August 4th 2013, here are the latest buy, sell and hold recommendations from Geoff Saffer Equity Analyst & Educational Facilitator at the Australian Stock Report.
Geoff has over 10 years’ experience researching and analysing Australian shares, with a passion for fundamental analysis and specialty in identifying undervalued companies – particularly at the smaller end of the market.
Buy Shares
Credit Corp (CCP) – Debt collection business boasts robust margins, high ROE yet trades @ 13x P/E. Low interest rates and strong balance sheet will allow more debt ledger purchases.
Pura Vida Energy (PVD) – Speculative energy play is high risk, but Moroccan project offers huge upside. Capital raising and $15m farmout fee provide funding for exploration efforts.
Hold Shares
JB Hi-Fi Limited (JBH) – FY13 results beat expectations, highlighted by same store sales growth in 2H. With 14 new stores set for FY14, JBH looks to be in for solid year ahead.
Santos Limited (STO) – High energy prices have helped cushion dips in production and sales volumes. LNG production in PNG on track for second half of 2014.
Sells Shares
Treasury Wine Estate (TWE) – We see more trouble ahead in the US, where a wine glut led to writedowns. TWE still trades on high multiples and will struggle to boost profit margins.
Paladin Energy (PDN) – Recently raised capital but operations are still leaking cash as prices plummet. Outlook for uranium sector remains bleak, highlighted by failed asset sale.
Geoff has over 10 years’ experience researching and analysing Australian shares, with a passion for fundamental analysis and specialty in identifying undervalued companies – particularly at the smaller end of the market.
Buy Shares
Credit Corp (CCP) – Debt collection business boasts robust margins, high ROE yet trades @ 13x P/E. Low interest rates and strong balance sheet will allow more debt ledger purchases.
Pura Vida Energy (PVD) – Speculative energy play is high risk, but Moroccan project offers huge upside. Capital raising and $15m farmout fee provide funding for exploration efforts.
Hold Shares
JB Hi-Fi Limited (JBH) – FY13 results beat expectations, highlighted by same store sales growth in 2H. With 14 new stores set for FY14, JBH looks to be in for solid year ahead.
Santos Limited (STO) – High energy prices have helped cushion dips in production and sales volumes. LNG production in PNG on track for second half of 2014.
Sells Shares
Treasury Wine Estate (TWE) – We see more trouble ahead in the US, where a wine glut led to writedowns. TWE still trades on high multiples and will struggle to boost profit margins.
Paladin Energy (PDN) – Recently raised capital but operations are still leaking cash as prices plummet. Outlook for uranium sector remains bleak, highlighted by failed asset sale.
September 3, 2013
Terms Of Trade - Share Market Education
Every Sunday Carl Capolingua who often appears on Sky Your Money Your Call, features an article around trading strategy in the Herald Sun.
Below are a couple of excerpts from these articles to help guide the way through the share market and hopefully assist in your own individual trading strategy.
The Power Of Three – Japanese Candlestick Patterns
Today we will look at two of the better known Japanese candlestick patterns on a chart; the Three White Soldiers and the Three Black Crows.
Three White Soldiers Like many Japanese candlestick formations, the ‘Three White Soldiers’ owes its name to the nature of Japanese society in the 1600s, which was saw continuous battles between feudal lords, as well as the emergence of the Dojima Rice Exchange in Osaka.
The Three White Soldiers is a bullish reversal pattern, which is characterised by three consecutive, advancing large white (or green) candles. Like all reversal patterns, we need to see a decent downtrend first, otherwise there would be nothing to reverse.
Click here to read the full article
Fibonacci Retracements In Identifying Support And Resistance
Much has been written about Leonardo Fibonacci, the gifted thirteenth-century Italian mathematician. Born in Pisa around 1170, Fibonacci not only introduced the modern use of decimal points, but also discovered the so-called Fibonacci sequence. The sequence begins with 0 and 1, and then adds the previous two numbers to produce a third, e.g. 0, 1, 1, 2, 4, 5, 8, 13, 21 etc.
The sequence then continues onwards to infinity. These numbers are seen as the “key” to nature, with the reproduction cycles of rabbits, branching patterns seen in plant life, and the “golden mean” used in art and architecture all corresponding to this mathematical sequence. Fibonacci discovered that the ratios in this sequence not only recur in nature but can also be seen in markets to indicate likely retracement levels.
Click here to read the full article
Below are a couple of excerpts from these articles to help guide the way through the share market and hopefully assist in your own individual trading strategy.
The Power Of Three – Japanese Candlestick Patterns
Today we will look at two of the better known Japanese candlestick patterns on a chart; the Three White Soldiers and the Three Black Crows.
Three White Soldiers Like many Japanese candlestick formations, the ‘Three White Soldiers’ owes its name to the nature of Japanese society in the 1600s, which was saw continuous battles between feudal lords, as well as the emergence of the Dojima Rice Exchange in Osaka.
The Three White Soldiers is a bullish reversal pattern, which is characterised by three consecutive, advancing large white (or green) candles. Like all reversal patterns, we need to see a decent downtrend first, otherwise there would be nothing to reverse.
Click here to read the full article
Fibonacci Retracements In Identifying Support And Resistance
Much has been written about Leonardo Fibonacci, the gifted thirteenth-century Italian mathematician. Born in Pisa around 1170, Fibonacci not only introduced the modern use of decimal points, but also discovered the so-called Fibonacci sequence. The sequence begins with 0 and 1, and then adds the previous two numbers to produce a third, e.g. 0, 1, 1, 2, 4, 5, 8, 13, 21 etc.
The sequence then continues onwards to infinity. These numbers are seen as the “key” to nature, with the reproduction cycles of rabbits, branching patterns seen in plant life, and the “golden mean” used in art and architecture all corresponding to this mathematical sequence. Fibonacci discovered that the ratios in this sequence not only recur in nature but can also be seen in markets to indicate likely retracement levels.
Click here to read the full article
September 2, 2013
Reporting Season - The Banks
With reporting season almost over we have a look the big 4 banks and their results. It was another bumper period for the banks as they continue to be a leader in the Australian share market.
Commonwealth Bank Australia - reported the biggest profit ever by an Australian bank for the period ended 30 June 2013. Net profit for the year rose by 8% to 7.68 billion with cash profit, a measure that strips out nonrecurring items, up 10% to $7.82 billion, beating the $7.62 billion estimate by analysts.
Click for more info on Commonwealth Bank shares
ANZ Banking Group - Recently released a trading update, showing revenue and profit growth while downplaying fears about a slowdown in China. Australia’s third-largest bank announced a $4.8 billion cash profit for the first nine months of its financial year, up 11% on the year before.
Click for more info on ANZ Bank shares
Westpac Banking Corp - Westpac, like the other big four banks, is sitting in a sweet spot at the moment. The company reported a $6.6 billion cash profit for FY12 – it’s largest ever result and 5% higher on a year earlier. Headline profit dropped by 15%, but this was due to a one-off tax benefit the year before.
Click for more info on Westpac Bank shares
National Australia Bank NAB - NAB has had solid 2013, with its recent quarterly statement evidence of this. Net profit for the three months through June was $1.70 billion, a 42% increase from the same period last year with cash profit increasing by 7% to $1.5 billion for the same period.
Click for more info on NAB shares
Post reporting there has been a slight shift away from the banks and towards the commodity market, but will solid dividend returns the banks are still a solid investment.
Commonwealth Bank Australia - reported the biggest profit ever by an Australian bank for the period ended 30 June 2013. Net profit for the year rose by 8% to 7.68 billion with cash profit, a measure that strips out nonrecurring items, up 10% to $7.82 billion, beating the $7.62 billion estimate by analysts.
Click for more info on Commonwealth Bank shares
ANZ Banking Group - Recently released a trading update, showing revenue and profit growth while downplaying fears about a slowdown in China. Australia’s third-largest bank announced a $4.8 billion cash profit for the first nine months of its financial year, up 11% on the year before.
Click for more info on ANZ Bank shares
Westpac Banking Corp - Westpac, like the other big four banks, is sitting in a sweet spot at the moment. The company reported a $6.6 billion cash profit for FY12 – it’s largest ever result and 5% higher on a year earlier. Headline profit dropped by 15%, but this was due to a one-off tax benefit the year before.
Click for more info on Westpac Bank shares
National Australia Bank NAB - NAB has had solid 2013, with its recent quarterly statement evidence of this. Net profit for the three months through June was $1.70 billion, a 42% increase from the same period last year with cash profit increasing by 7% to $1.5 billion for the same period.
Click for more info on NAB shares
Post reporting there has been a slight shift away from the banks and towards the commodity market, but will solid dividend returns the banks are still a solid investment.
August 12, 2013
Buy Sell & Hold's From Geoff Saffer
These were the weekly buy sell and hold recommendations from Geoff Saffer of the Australian Stock Report that were in the Herald Sun August 4th 2013.
Australian Buy Shares
Infomedia Ltd (IFM) – Experiencing strong demand for its car dealer software, including expansion in key European market. Offers decent value at 5% yield and FY14 P/E of 15x.
Blue Energy (BUL) – Expect to see further reserve upgrades from this small oil developer. Has plenty of cash, operates and owns 100% of its key acreage in QLD.
Australian Hold Shares
ANZ Bank (ANZ) – The banking sector looks fully priced, with added uncertainty from bank deposit levy. Of the majors, ANZ currently offers the best value.
Telstra Corp (TLS) – We see some modest profit growth ahead for Telstra, but valuation looks stretched trading on significant P/E premium to market and yield approaching 5%.
Australian Sell Shares
Qantas Airways (QAN) – Despite recent share price falls, outlook remains bleak. A weak AUD, higher relative oil prices, falling margins and negative free cash flow suggest more pain ahead.
Troy Resources (TRY) – Recent quarterly report shows cash costs rising, with recent takeover of AZH proving to be poor timing with gold in the doldrums.
If you would like more info on Australian Shares, visit the Australian Stock Report today.
Australian Buy Shares
Infomedia Ltd (IFM) – Experiencing strong demand for its car dealer software, including expansion in key European market. Offers decent value at 5% yield and FY14 P/E of 15x.
Blue Energy (BUL) – Expect to see further reserve upgrades from this small oil developer. Has plenty of cash, operates and owns 100% of its key acreage in QLD.
Australian Hold Shares
ANZ Bank (ANZ) – The banking sector looks fully priced, with added uncertainty from bank deposit levy. Of the majors, ANZ currently offers the best value.
Telstra Corp (TLS) – We see some modest profit growth ahead for Telstra, but valuation looks stretched trading on significant P/E premium to market and yield approaching 5%.
Australian Sell Shares
Qantas Airways (QAN) – Despite recent share price falls, outlook remains bleak. A weak AUD, higher relative oil prices, falling margins and negative free cash flow suggest more pain ahead.
Troy Resources (TRY) – Recent quarterly report shows cash costs rising, with recent takeover of AZH proving to be poor timing with gold in the doldrums.
If you would like more info on Australian Shares, visit the Australian Stock Report today.
July 8, 2013
Five Key Factors For Short-Term Trading
Brett Steenbarger, one of the world’s most-renowned experts on the interplay between psychology and trading, outlined five guiding principles of trading psychology, concepts that attempt to delve inside the minds of traders.
These principles – outlined below – are important concepts when it comes to understanding trends in short-term trading.
Number One: Markets are guided by their largest participants.
Number Two: Trends are created by shifts in supply and demand, and generated by global or macro relationships.
Number Three: Market movements on strong momentum will persist in the short run, whilst moves on weak momentum tend to reverse.
Number Four: There are only three kinds of trades, and these are breakout trades, trend-following trades, and reversal trades.
Number Five: It is useful to track market activity at the bid and offer in detecting shifts in short-term demand and supply.
If you would like to read the full article you can do so by visiting the Australian Stock Report how to buy shares blog.
These principles – outlined below – are important concepts when it comes to understanding trends in short-term trading.
Number One: Markets are guided by their largest participants.
Number Two: Trends are created by shifts in supply and demand, and generated by global or macro relationships.
Number Three: Market movements on strong momentum will persist in the short run, whilst moves on weak momentum tend to reverse.
Number Four: There are only three kinds of trades, and these are breakout trades, trend-following trades, and reversal trades.
Number Five: It is useful to track market activity at the bid and offer in detecting shifts in short-term demand and supply.
If you would like to read the full article you can do so by visiting the Australian Stock Report how to buy shares blog.
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