During November the Indexes continued their decline and the markets were volatile. Increasingly voices are being raised about the prospect of a “Bear” market which we have been talking about for a while. We are mostly in cash so now we can start looking for possible candidates as we wait for the market upturn which will eventually come.
First lets us look at Indices, no point in buying a share in your favourite Index if that index is showing down. As a rough guide you could look at the S & P 500 index as when it begins to rise sooner or later most other indexes will follow.
So what would constitute a rise in an Index from down to up? You could use a monthly moving average, or something like a Heiken-Ashi monthly bar colour change or an indicator like the monthly Coppock crossing zero on the way up. Anything that you are happy with to stop you trying to pick the market bottom.
Having established a plan for the Indexes we now need to start looking for shares that have value built it and that are strong cash generators. In other words strong companies that have currently a cheap share price. So what constitutes a cheap share price? A price that does not reflect the value of a company ie a price that does not carry much (if any) of a premium to the underlying asset value. To do this simply multiply the price with the number of shares on issue and compare the resulting figure with the total assset figure in the last balance sheet. You can search for such companies either in the financial press or by using specialist software that can be rented for a relatively small monthly outlay and which will do this for you. Now you will have a list of undervalued companies so the next step is to pick out the diamonds from the dross. We will begin to look at this next month.