Part 2 is here.
Part 1 is here.
This is proving to be more difficult than I expected.
I set aside a small sum of my money to manage proactively towards the end of last year. The strategy which I'll explain in another post proved successful (due to luck?!). To decide when to sell the stocks and maximise my return, I have to figure how long the current rally will last. So how to do that? Can it be done accurately? Isn't the market random? I knew from past experience that in the Asian Crisis, SARS recession, etc that rallies such as the one huge one we have seen in recent months will top out and end with a sharp selloff or a huge correction.
How do you go out finding a market top? Go around and look for someone who has done it with relatively good accuracy in the past and see what he says about this rally. I actually found such a person on the Internet -a MIT graduate who forecasts how long stock market rallies will last based on how much cash was built up prior to the rally. He has a website that explains his theory and how it is applied[Link]. This forecaster predicts the rally will end roughly mid to end Oct 2009 based on his theory. Based on his forecast, we may have already seen the peak for the current rally. However, I didn't see what I usually see at a market peak - euphoria, general optimism and a huge final surge that sucks in the remaining liquidity at the sidelines. I was considering selling my stocks in batches if such an identifiable peak does not materialise and the market goes into a slow grinding slump. My getting out of the market has been made harder by the recent US$ carry trade disruption - in the past few months, hedge funds borrowed billions in the falling US$ because interest rates are low and used this money to invest all over the world and in all sorts of riskier assets. A few days ago, the US$ moved up and this forced the hedge funds to sell their holdings cause a sharp drop in the markets - gold, equities, commodities all fell in tandem. Such disruptions also reverse abruptly and you will see some of this today as the market spikes up because the US$ weakened sharply yesterday and hedge funds resume their buying.
Bloomberg : U.S. Stocks, Oil Rally as GDP Signals ’Waterloo of the Bears’ . Remember if there are no bears and everyone is bullish, it usually marks the end of a market rally....so the sudden upside reversal of the market, which may trigger a final 'euphoric' spike will be the Waterloo of the bulls and not the bears! Just to put things in perspective, the rally of the past 6 months is the largest and sharpest in decades. Here a chart from someone by the name of momoeagle in the Channelnewsasia forum.