Out of the dark depths of a bear market
The dark depths of a bear market and great alarms = opportunities
WHEN IS the most profit made on the stock exchange? When things look their worst and the man in the street panics as a result of alarmist headlines.
For example, take the al-Qaeda attacks on targets in the United States on 11 September 2001, when the World Trade Center in New York and part of the Pentagon in Washington were destroyed. Shock waves hit markets worldwide. Anglo American, a local icon, collapsed by about a third – and then turned around and climbed by around 150% in five months. By the way, if you used the moving average triplets discussed so far in this series, you could have at least doubled your money.
It’s important to stick to quality shares with good profit prospects when alarm opportunities occur, because everyone wants them; and the large players, who ultimately determine prices, will buy when they see exceptional value. Just look at the way large unit trusts climbed in when Old Mutual dropped to 454c last year. Powerful buying pushed Old Mutual up by around 230% over eight months before a meaningful downward correction.
To succeed when alarmist news upsets the markets you must comply with two requirements: exercise patience until the opportunities arise and there must be capital immediately available.
Smaller investors tend to want to invest when they have money available rather than waiting until the market or a share is ready (offers value). A study of bear markets – by international analyst Harry Schultz and extending over 100 years – showed the small investor tends especially to start “investing” at market peaks. The small fry push the prices up among themselves in an effort to make money quickly and when the last one has invested there’s only one way for the market to go – south, until value is restored.
As already shown, using moving averages in this kind of situation will help you to avoid losing money. But there’s another aid that can be useful: trend lines. Look at Anglo American’s graph. Over the ultra long term trend lines – which link rising low points – is undoubtedly upward. Anyone who started at point A would now show a profit of 2 950% (excluding dividends). In other words, R100 000 invested originally would now be worth about R3m.
How many of the eager in-and-outers who conduct such profound debates on the market every day can equal that kind of success? Incidentally, if you’d used moving averages (especially over the long term) the return would have been much higher.
Along with moving averages, trend lines can also be useful in giving you a general idea of where you’re standing with a market or a share. There’s no rule telling you a line must be straight. It could also link the upper or lower turning points – usually called resistance levels in a rising market and support levels during a decline – to form a curved line. Resistance levels are where sellers come in to stop an uptrend and support levels are where the bulls come in and turn around the bears’ attack.
The idea with trend lines is to give you an indication of when a trend could be nearing its end. Nobody can say exactly when it will change, but such a line linking the points of the smaller trends (Dow’s small and medium-sized waves) can nevertheless give an indication of when momentum will be lost. It’s sometimes compared with a ball thrown up into the air that gradually loses momentum before dropping again.
It’s clear there’s a change of gear developing where it falls through point Y. So is it advisable to switch to a neutral or even a selling stance? You may miss that last bit of profit, but remember: the market is already high – actually, very high – so leave something for the next chap, who’d have been hurt badly in the subsequent bear market if he didn’t have a selling strategy.