Monthly Archives: August 2015

Beware of the bull trap – is this a repeat of 2008?

The market volatility over the past week has been extraordinary. In a world of low interest rates the equity markets provide one of the few places to achieve a reasonable return so the bargain hunting which has emerged over the past few days is understandable.

No doubt volatility will continue and given the number of negative economic influences world-wide I would suggest that we are witnessing a bull trap with a high probability that the market will move much lower. In fact the market gyrations of the past week are reminiscent of the early part of the 2008 bear market.

Consider the daily chart of the S&P500 which fell 12% from its high over a period of a month. From the chart a likely scenario is a recovery to the 50% Fibonacci level at about 2000 (marked in red) before the bear market develops. The VIX has spiked and remains… Continue reading

How far can the Australian dollar fall?

The value of the Australian dollar (AUD) is affected by a variety of factors.  The more important of these are interest rates, commodity prices and the Chinese economy. But other factors include the RBA rhetoric, national growth numbers, consumer and business confidence, labour and housing markets, the equity and bond markets, inflation figures and of course the strength of the United States dollar (USD).  All of these are parts of a puzzle when it comes to valuing the AUD.
When one considers that most of the above factors that affect the AUD are likely to deteriorate further, a continued fall in the AUD can be expected.  Consider the monthly chart of the AUD below.  The Australian dollar has fallen significantly from its high of $1.10 against the USD but at its current value of 71 cents it is now merely at about its long term average,… Continue reading

The emotion of a bear market

You can feel the emotion when there is a big correction and the likelihood of a bear market. While I was able to avoid the 2008 bear market unscathed this time there have been some losses. Nevertheless I have stuck to the investment plan and sold when stocks hit their stops.  The plan has worked well but there are always the unexpected events and this year there was the sudden and unexpected loss by Slater and Gordon. Regret, yes but no emotion. The market is all about psychology, emotions are dangerous and can only be avoided by having a well-tested investment plan. The plan means that as an investor you stay within your risk tolerance and every response to a market move can be calm and rational.

With a fall of 8.5% on the Chinese market on Monday the nasty night on Wall Street and in Europe was… Continue reading

A correction or a bear market?

The market down-trend is well established, with the ASX200 falling by 13% since April, so this has been a solid correction. Technically a correction is regarded as a fall in the index of up to 20%.   A fall greater than 20% is a bear market. Is it likely that we are headed for a bear market in Australia?

There is no doubt that the Australian market is very vulnerable. Not only is Australia a commodity exporter during a commodity bear market but we are very dependent on a declining Chinese economy. The very recent devaluations of the yuan indicate how serious this decline is. The Chinese equity market has suffered significant falls last week despite intervention and manipulation by their government and we should expect further falls in the coming week.

Consider the weekly chart of the ASX200 below. The index has now fallen to a strong support… Continue reading

Does timing the market matter?

Timing the market seems to be a controversial subject among investors but there should be no need for debate. Fund managers claim that to be profitable, you cannot time the market. It is in their interest that investors leave their funds with the fund manager who collects high fees whatever the market condition and however poor the performance. So of course the fund manager will say that the market cannot be timed and they hope to perpetuate the myth.

But timing the market does matter.   Consider the monthly chart of the ASX200 below. If an investor had put funds into the market at the end of 2007, within a year the loss would have amounted to more than 50%. By contrast had the investment been made in March of 2009 a substantial profit was made over subsequent years, so timing the market is of great importance. There is… Continue reading

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