Out of the dark depths of a bear mar­ket

The dark depths of a bear mar­ket and great alarms = op­por­tu­ni­ties

Finweek English Edition - - Front Page -

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.

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