Wednesday, August 24, 2011

The Bull Vs The Bear

In a bull market, the market ignores bad news. In a bear market, the market reacted on bad new, not-so bad news, all kinds of news! In March 2009, the beginning of a bull, people refered to any rallies as bear rallies. They were in a terrible bear trend and couldn't believe the bear was over, so when there were some rallies, they called it the bear rallies!

Now, I see similar reaction here in August 2011, we have enjoyed a superb bull run for over 2 years, and suddenly the sign of the fear struck and we are now wondering is this still a bull? Whever investors start to have this thought and as their thoughts get stronger and stronger, these thoughts will menifest through self-fufilling which weaken the bull and finally give way to the bear!

By human nature, we always find ourselves in the state of denial and thinking that we are still in the same old condition as before. But evidence showed that even if we are in the bear trend, we won't realise untill several months later when we see that the stock prices testing for year lows.

Investing in bull market is easy: buy low, sell high! But investing in the bear market requires more skills because in a bear trend, companies get smaller earnings per share with gloomy outlook, and technically most stock are trading below 200 days moving average, all these discourage you to buy in a bear market. One way to overcome this is to buy your favourite stocks (preferably blue chip stocks with good management) in stages. It is important to invest through stages because you never know when is the bottom, so as the prices go lower, you kept buying. The key here is to overcome your fear by having a system in place so that you act as a robot rahter than a human!

Happy investing,
Pauline Yong

Monday, August 15, 2011

Stock Crash

In the recent stock crash, he DJI had an unprecedented wild ride initiated on August 4th a crash of 512 points (4%)due to a downgrade of its long term debt by Standard and Poors. On August 8th, DJI shed another 635 points (5.5%) but on August 9th, DJI had a big jump of 430 points (4%), however, on August 10th DJI swung negatively by 562 (5%)points due to rumours that a French Bank might be in financial distress. As predicted, the next day a big swing to the positive side by adding 424 (4%)points.

In 6 trading days, 5 days had more than 400 points (or 4%) move! That was unprecedented and it definitely affected the stock markets around the world. Our KLCI had a sharp fall but compared to the regional markets, as usual, we dropped the least. But still, the damage was done to our stock market technically, as our KLCI is now trading below 200 day moving average, it could signify the beginning of a long term bear. By long term bear I mean 9 months - 1.5 yrs based on the past trends.

Currently, I can see an intense fight between the bull and the bear. Last week's event was a first sign of fear that the investors express it on the stock market after a 2 year bull run. Let's think objectively: (1) Have we seen any default yet by any of the U.S. or the European debt ridden countries? (2)The property market in Asia is looming but has it burst? (3) Interest rates around the world are considered low as we just recovered from a recession 2 years ago, so that's good for the stock markets, right? So what hasctriggered the crash on August 4th?

Some said it could be some political motive by the supporters of the Republican that they want to teach Obama a lesson by having a stock crash on his birthday. It's not uncommon to have this thought because the recent debt ceiling negotiations between the Democrats and the Republicans have exposed the weakness in the Obama's administration. Investors feel that Obama may not be able to handle well the current economic problems the Americans are facing, and that would hurt the U.S. economy which in turns affects the stock market negatively.

So the recent stock market crash has clearly send out a strong signal to the world that the investors do not have the confidence that the Obama administration can resolve its economic problems well, their historically high debt level may raise the risk of default by the U.S. government. Even without a default, the country is facing inflation problem and the depreciation of the US dollar may give havoc to the rest of the world.

For one, China would be in trouble since they are the largest holder of the American debt with more than US$1 trillion. And many central banks around the world will see their foreign reserves depreciate as the dollar depreciates.

In addition, the European countires like Greece, Spain, Portuggal and more seemed not committed in cutting their fiscal (government) spending, as they are afraid of losing the popular votes. So in the next 2 years, It won't be a surprise if I see defaults in governments in these countries.

So what to invest? I'm still saying the same old words: For short term investors, go ahead and take advantage of the market volatility, as for the long term investors stay away and wait patiently!

Happy investing!

Pauline Yong