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30th November 2020


It's been a great first year here at SEXTON READS THE CHARTS! A total of 22 stocks were recommended as buys, in our first year of operation since starting off in October 2019. These have returned an average gain of 16%, which is even more impressive when one considers that the average holding period was only 6 months. Furthermore, of these 22 recommendations, 19 were winners and only 3 were losers, giving a very impressive successful strike rate of over 86%.

The S&P 500 index is up 11.7% for the year to date. The 16% average return per stock recommended during that time frame, therefore constitutes very significant outperformance.

CLICK HERE for a breakdown of the performance to date of all stocks recommended.

So let's look at what worked really well, and what didn't work so well in 2020, together with an updated recommendation for each of these stocks.

The best set of recommendations came in an article on the Market Topics section (which contains all of the recommended stocks) in April 2020 headed 'Best Stocks To Buy'.

The rationale here was to select only from the US market, as it tend to outperform all other markets. Then identify the stocks that were already outperforming the market, before the March/April 'covid crash', and had managed to retain their upward trend despite this sharp fall in the market. The idea here, is that when the market takes a nosedive, the stocks to buy are not the ones that have fallen the most. No...the bargains are actually in the stocks that have fallen the least.

This lead me to recommend Adobe (+62.5%), Amazon (+67.5%), Eli Lilly (+5.5%), Microsoft (+40%), Netflix (+36%), Walmart (+27%).

So what is the recommendation on these now? Well, there is one notable underperformer - Eli Lilly so I would sell that one and hold the rest. Lilly probably benefited from investor speculation about who will come up with a covid vaccine, and in 2021 that will be yesterday's news. The others all have very high P/Es but they are growing fast and are therefore difficult to value. My verdict is to keep holding them, as long as their charts remain positive.

The first indication that a high growth/high momentum stock has run out of road, is almost always from the chart. By the time you see the slowdown by looking at the fundamentals, it is nearly always too late to sell out at a good price.

Forget about selling at the top - it can't be done. The best you'll do, is sell out during the first stage of a bear market for the stock, by using technical analysis, so you will be selling some way down from the all time high.

Technical analysis will not get you in at the bottom, or out at the top, of a stock. However, it will usually get you in, after the stock has bottomed, and when a new bull market in the stock has begun. Also, it will usually get you out, after the stock has peaked, but before it goes into a really steep downward trend.

The trouble with fundamental analysis, is that it often gets you in way too early. All the analysts were saying "look at the P/E, look at the dividend yield - that stock is so cheap!" so you buy. Then it goes down another 30%! It might have been cheap, but the problem is that no one is buying it, so it gets even cheaper.

The other problem with fundamental analysis, is that it usually gets you out too early as well! All the analysts, or most of them, are saying "it's too high, look at the P/E etc" so you sell. Years later, you realise if you had held on, you would have a 'ten-bagger' in your portfolio.

Why is fundamental analysis so poor in that regard? It is not so much the methodology itself that fails, it is the poor application of the methodology by analysts and other commentators. For example, they often fail to spot that the company has a new high margin product that is growing fast and will make a very positive impact on earnings in the near future. That is a failure in the application of fundamental analysis, rather than a defect in fundamental analysis.

So what else worked well? The same methodology above (ie outperforming before and during the covid crash) was applied to the UK, Euro Stoxx 50 constituents and Irish market.

Only one UK stock was selected, Admiral Group (+24%). The Euro Stoxx 50 constituents selected were Schneider Electric (+21.5%), L'Oreal (+10%), ASML Holdings (+1%), Deutsche Boerse (-14%). The Irish stocks selected were Flutter Entertainment (+20%), Kingspan (+16%), Kerry Group (+7.5%), Greencoat Renewables (-10%).

It may be a little too early to properly assess these, given that the Euro stocks were selected only on 25th June and the Irish stocks in late July / early August. However, if the underperformers here (ASML, Deutsche Boerse, Greencoat Renewables) are still in the negative column by next March, then I would dump them. Why? Because the December to February period is usually the strongest part of the year for stocks (the reasons why will be the subject of another article in Market Topics), so it they don't perform then, they are usually turkeys.

A review of the 'FAANG' stocks on 21st May, selected Facebook (+21%) and Microsoft (+16%) again, both of which continue to look good.

Research from non-technical sources lead to recommendations for BT Group (+11.4%) and Discovery Communications (+21%). These continue to look interesting. The latter selection, in particular, raises the question about the high cost of providing content for broadcasting outlets. One only has to consider the mammoth remuneration sought by the likes of Joe Duffy and Pat Kenny, compared to the low cost of producing the Discovery Channel which only has to put a camera in front of a few chimps (who are arguably more informative).

I have omitted the last two articles written in Market Topics, as it is too early to assess these. However, they are all off to a good start - 'Oct 2020: Best US Shares To Buy?' recommended Texas Instruments and Colgate Palmolive both of which have moved up a bit since then. Also the stocks recommended in 'Nov 2020: FTSE 100 Outperformers' are showing an overall gain after just a few weeks.

So what did not work so well?

The main problem was the topsy-turvy nature of the market. We started off in a bull market at the end of 2019, and the verdict in the Overall Market Trend section was that the technical indicators for the all important US stockmarket, as measured by the S&P 500 index, were bullish. I then changed this outlook to bearish on the 10th of March 2020, with the index at 2,829.

The market began to recover from the 'covid funk' and I changed again on the 8th of June 2020, with the index at 3,194 (+13%) to bullish, and continue with a bullish outlook now nearing the end of 2020.

That is about as good as one could expect from technical analysis. However, I did recommend the Wisdom Tree 3x Daily Short FTSE 100 ETF (3UKS) on 10th March when I turned bearish, and closed out on 8th June when I changed back to a bullish outlook. That is three times leveraged, so it fell 58%. However, that loss is partially mitigated by the two stocks recommended on the same Overall Market Trend article on 10th March, Polymetal International (+22%), Rentokil Initial (+5%).

There is no strategy that works every single time on the stockmarket. The best you will get is a strategy that works most of the time, and is based on a rational and professional methodology, so it is therefore likely to continue to work most of the time well into the future.

That is exactly what you get here at SEXTON READS THE CHARTS.

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