I get the feeling that some, mainly investors using fundamental analysis, don't like or bother with charts. There is a view that technical analysis is hocus pocus or doesn't work, whereas I tend to feel that more often than not it is our own psychology trying to interpret the action a chart is showing that doesn't work (I've been there!) I also believe that even if you are an investor who makes their choice on fundamentals, charts can help you to time your buy (what time frame are you trading investing in?). This is not the same as trying to time the market, it is about buying when the probability of the direction of the market trend is on your side. Charts tell us this as all they show is a reflection of human behaviour in a chart form - traders and investors - buying and selling. By and large, price and trend going up = more buyers than sellers, more demand, while price and trend going down = more sellers, less demand. There may well be some price manipulation of varying kinds along the way, but for the most part it isn't that difficult to understand why price goes up and down, it's supply and demand and a large dose of sentiment.
However, there is also the question of whether people really want a market crash or more likely, a correction. The financial media often muddle these two up, calling corrections crashes, when in reality they are not. A market crash and its aftermath can be a totally different beast than a simple but sometimes uncomfortable correction in a trend or change of trend. I suspect that most investors, especially those that don't use charts, really prefer corrections they can then buy into, any market downturn not lasting too long or punishing you if you get in too early. A crash and its aftermath is more likely to do that and leave investing scars that can last a long time if you catch the falling knife too soon. Surely it is better to have a look at the longer term charts and see what the actual trend and direction is before actually parting with your cash?
Interesting question. After reducing the leverage in the last few weeks I’d like SX5E to get back down to 2000 to load up again!
ReplyDeleteI think the key is to make sure you don’t commit too hard too soon because you won’t know where the bottom is until some months after the fact. I don’t really use charts other than to see how the current level compares to the price over the last few years. If its low then increase leverage, if high reduce leverage.
I think they key is to have a realistic plan worked out in advance. Some of this includes:
- Knowing yourself and how you reacted the last time there was a crash.
- Knowing exactly what your going to buy if the market falls 10%, 20% etc.
- Knowing what possibilities have you got to increase leverage if the market keeps falling: options, warrants, mini futures etc. With many basic stock accounts in the UK the only leverage you can get is via warrants ( e.g. if JMG falls at what level will you start buying JMGS?)
- Having credit arranged beforehand.
Some suggestions:
- If your going to increase leverage with a large portion of your portfolio then buy indexes and not individual stocks. Volatility and risk of going to zero is much less than individual companies.
- As some protection of going bust have multiple portfolios one used as trading and one long term. Don’t touch the long term portfolio until it drops 20-30% and then only increase the leverage slowly!
So do I want a crash or a correction ? A 30% fall would be nice. Any more and it starts getting a little uncomfortable.
It's difficult to see how the markets would drift into a 30% fall. For something of that magnitude something major would need to happen. I can see the possibility of fiscal drift taking markets over the fiscal cliff once the US Presidential election is out of the way. There is precedent for this in the US with TARP and when the national debt level was raised when politicians fought each other until the last minute to get the best deal for their own interests. Could easily happen again, going right up to the last minute until some compromise is reached.
DeleteThings are just as likely to muddle through because the financial system itself is about muddling through.
Markets are due a down period anyway, which is more likely to fall into the correction category rather than crash. There needs to be some dynamic, an event, to cause a crash. As more potential crash events get priced in, markets are less likely to react to such events with the same volatility as in the past. Instead they will find some new fear no doubt.
Yeah - I pretty much agree with the above. Whilst I'd like a 30% drop cannot see an obvious trigger to get back down to those levels. But things can change quickly if the Germans, tea party or Iran kick up a fuss...
DeleteSo in the meantime with leverage back down to 1 its time to just pick up 5% dividends from EuroStoxx and wait to see what happens. If markets rise then fine there is some capital appreciation as well as the divi, if they fall then its time to go shopping.
BTW - Not sure how easy it is to buy them from the UK but some Swedish Telcos tend to pay out all the annual earnings so you get a yield of 6 to 9%. You can also buy mini futures on them where the financing part is 4% which can boost the yield on your investment to well over 10%. Nice place to store cash until better opportunities come along.
Hi, interesting that you posted on TMF. I tend to browse the boards there regularly but for some strange reason have clocked up most of my posts back on GEI.
ReplyDeleteSeems as you mention posting on boards, can I just point out that TMF seems to attract various different types/discussions. At TMF there is not so much discussion under the articles (which is where you posted), expect you would have got more interesting responses under the boards themselves:
TA (where you might have got some agreement): http://boards.fool.co.uk/technical-analysis-50111.aspx
or investment strategies (more likely to attract differing opinion!): http://boards.fool.co.uk/investment-strategies-50090.aspx
- just saying thats all, keep up the good work