Saturday, November 21, 2009

Stock Market : Picking a Top Part 4.

Part 3 is found here.

A few of you wrote in the comments section to ask about the stock market.

Here are my thoughts.

After I called a peak at roughly the middle of Oct 2009, the market (Dow Jones Index) fell about 5% after it peaked on 19 Oct. It rebounded from the low in early to rise to another peak earlier this week. I believe this whole rally is driven large by liquidity. On and off we get some economic bad news that get investors worried so they sell off and cause the market to have these small corrections of about 5-6%. We had a number of these since June 2009 and each time the market recovered to reach new highs. In the past postings on the same topic, I said that it can be quite difficult to pick a top unless there is an identifiable final peak. I'm trying to figure it out. The market is starting to look very familiar to what happened in 2003. In the 2003. the market hit a low in March, ran up like it did this year. Along the way, the usual worries about the nascent economic recovery caused a few ripples in the market but no major correction. Like 2009, the market in 2003 was also driven by liquidity following a series of rate cuts that caused the interest rate in the US to be near zero. Like 2009, the 2003 recovery was also a "jobless recovery" so doubts about the economy kept recurring throughout rally. The 2003 rally looks like this:

Our current stock market rally is actually larger than the one in 2003. However, the psychology of the market is very similar so is the duration and the type of 'small' corrections we have seen in the past few months.

If you look at the 2003 chart, there is a big final run up somewhere from mid-Nov to the end of 2003/beginning of 2004. The question in my mind right now is whether we will see a similar run up in this rally that will take us right to the end of the year. I tend to remember things about the economy and stock market very clearly - in mid-Nov 2003, there were nagging doubts and worries about recovery...then all of a sudden, in a matter of days, investors became very optimistic and the market rose - and it did so continuously because the beliefs of investors were reinforced by the rising market and the coming Christmas sales which analysts kept insisting will boost the economy.

The market in 2009 is going through a very similar phase. I think we might see a point in time when doubt is replaced by euphoria resulting in a final run up that will mark the end to this magnificent rally. 2010 might look like 2004 when the economy strugggled to stay out of recession and the stock market went nowhere for a whole year.

In case I'm wrong, I've also put in trading stops to protect my profits from the current rally and if the market becomes directionless, I will sell in small batches. I'll describe in some detail what I did and how I generated those returns when it is all over.

While these are my thoughts on the market and I intend to go along with my plan.....as I'm not a professional, I suggest you guys take what I say with a pinch of salt.

7 comments:

Musicwhiz said...

Hi Lucky,

Thanks for the insightful commentary, and I am reading it by way of interest. What the stock market is doing generally has o bearing on the decisions I make as an investor, except to alternately offer me wonderful opportunities to buy good companies at a discount; and to sell over-valued companies.

Other than the above, I feel obliged to ignore the daily fluctuations.

Good luck on your trades!

Musicwhiz

Anonymous said...

Even if the commentary comes from a professional, one still has to take his comments with spoonfuls of salt.

Anonymous said...

Mr Lucky Tan is no more than a half brain analyst working in shenton way. why? becasue the jobscope involve telling you what would happen next week and spent the week after explaining why it did not.

1000% returns?? sounds like fantasy unless it is done by unbeleiveable leverage and prime financing which is usually not accorded to minions like you Mr Tan.

Anonymous said...

ISD really should step in and incacerate this hate promoting bastard. A simple detention should solve this bravado behind a computer.Mr Tan, that is you!

Anonymous said...

We should respect everyone's view. If you think he's promoting hate, then pls visit youngpap website/straitstimes to get your dose of love. Congrats on your 1000% return. But if I have heed your advice, I probably would get only 15% return.

Lim Leng Hiong said...

Hi Lucky,

Have you read this article?

http://seekingalpha.com/article/174798-pay-extra-close-attention-to-the-dollar

Excerpt:

"In plain terms, it’s truly incredible that the Dollar hasn’t fallen further already. The fact that it hasn’t, combined with the numerous bounces we’ve seen in the US currency in the last month, is a serious sign of US Dollar strength. If the Dollar begins a real rally moving above its 50-day moving average (see the chart above), the entire inflation trade would blow up with stocks and commodities (potentially even gold) entering a free-fall."

Graham Summers thinks that the USD is still too strong after all that low interest rates and quantitative easing.

Due to the massive use of USD as a carry trade, an unexpected spike can potentially cause a flurry of short covering which is stocks and commodities negative.

I don't know how likely is this scenario, but I think it's a good idea to keep an eye on the US dollar.

Anonymous said...

Mr Lucky Tan, I respect your views and coincidentally this post has hit the bulls-eye with regards to the December rally. Congrats!
But I find the "I'm not a professional" disclaimer a little disturbing, because as we should all know by now, the views of professional analysts usually have the same bearings as those who flip coins for a living.