NZSX50 Index

[Phaedrus]

I use the NZSX50 Index to regulate my exposure to the NZ sharemarket. So long as all of the indicators shown on the chart below are positive, I have 100% of my NZ capital invested. Every now and then there is a retracement of sufficient magnitude to trigger the "medium-term" indicators. To me this signals a time for caution, during which all stops are tightened, all Sell signals must be acted on, and buying is prohibited. There have been 4 of these periods over the 5 year Bull market. You can see that each of these has stopped short of breaching the "long-term" indicators. No-one knows how low the current retracement will go or how long it will run for, but right now, it is no more severe than any of the others.
The rationale behind this system is that any serious major correction will be preceded by a period of weakness. There is plenty of time to exit the market in an orderly fashion so long as you monitor the situation carefully. The idea is that if you pass the parcel every time the music slows down, you will not be the patsy left holding if/when the music stops. I view it as a compulsory insurance policy! Currently, this approach has me 55% cashed up in NZ and 75% cashed up in Australia. My plan is to go to 100% cash should the current weakness extend below the long-term indicators. These have not been broken in 5 years. If this market tanks, I am NOT going with it.

[Lizard]

Thanks Phaedrus. I was just wishing you'd post that chart again! It stuck in my mind from the old "when does the dream run end?" thread. I had been trying to draw comparable charts on Yahoo Beta charts and only getting half the indicators.

I think this chart and the "tighten-stops-no-buying" method is probably the most valuable idea I have come across on share forums.

Do you have a similar chart for the ASX?

[ratkin]

To offer a different view , those areas of caution have provided all the best buying opportunities during the bull market. No doubt the falls were all overdone due to traders stopping out , providing good buying times for long term investors.

Also , if the market does crash , i mean really crash then it is very likely to be very sudden and led by the US. One day we may wake up to see the dow has plunged 1000 points or more , unlikely but could happen. In this scenario then you would go down with the market , our market would open so low that you would take a very big hit.

Rather than be bound up in this mechanical process of yours i prefer to look at what is actually causing all this turmoil and using that information to take advantage of the mass selling to pick up stocks being unfairly bashed.

For example under your system you would treat a stock exposed to sub prime troubles exactly the same as you would treat a supermarket or utility stock. You wouldnt buy any of them .
With your methods now so widespread this creates big bargains in quality stocks that have no real reason to fall.

One day of course you may be right , the world may cave in, stocks may fall 50% and many companies could go to the wall . Way i look at it is if this happens we all in trouble anyway . Whose to say your banks wouldnt collapse taking your cash with them ?
Look at what happened to access brokerage a while back, and bridgecorp.

To sum up i prefer to be brave and force myself to buy when times get ugly, its not easy , human nature means we naturally want to do the same as everyone else , to seek reasurance in numbers etc, its tough going against the flow .
Scary , yes it is , but rightly or wrongly if i shall be commiting a few percent of my funds on monday , and if the market falls again tuesday then i will buy more.

Im sure that if you only ever bought shares when the mainstream tv news started their bulletin with a stockmarket crash story you would be well ahead of the game. If you sold instead then you would be well behind

[Halebop]

Ratkin the challenge with your alternative approach of picking shares that have been "unfairly bashed" is sometimes they get bashed for months or years. The buying opportunities are most easily able to be spotted after the event, not during. This is why charts can work more often than not rather than being their weak point.

[KiwiBear]

Halebop agree with you 100%. As Non educated investor straight after the 87 crash I waited till the rise in price of Brierly and Jones to put my hard earned cash into. Only to find that it quickly reversed and continued down.(Dead cat bounce)
My first leason taught me the hard way- it then slowly wents sideways with Jones later disappearing.

[KiwiBear]

Here's an email alert that David Elliott sent me yesterday morning (Thursday, August 9th). To see how 'good' David really is at market timing... just look at the dive on the Dow yesterday.

Down -387 points! And he called it pre-market.

"Yesterday the DJ-30 hit a horizontal trend line high from the June and early July charts, it is, so far, a market cap on a failed retest from below.

The DJ-30 failed the "Trendline cap" yesterday, one we have discussed over the last 2 months both on the July rally and now the market drop.

Currently we have the good makings of a "Head and Shoulders" chart down move with that "CAP" trendline being the right shoulder high.

The failure of the DJ-30 50 sma and 20 sma today would confirm the continued down trend we started last month. It would also be an IHF ( Ice hole failure) for the DJ and suggest new lows for the market in the coming days and weeks.

Confirmation would be a close below the 13,450 and negative follow thru for the markets on Friday.
ADX has not confirmed this last 3 day rally as anything more than a bounce in a bear move.
And the 2 day charts suggest a "Snap Back" down to a new market low.

DJ-30 13,264 break would then suggest a move to 13,000 level and possibly lower.

The times are US remember a day behind us

[Lizard]

On the same indicators as the NZX chart, has the Dow actually triggered a caution zone yet? Not clear to me that it has - but I can't get such nice charts as Phaedrus.

Maybe those who can accumulate new capital from other sources can ride out a bear market. But for anyone who relies on investment income and/or does not add to their capital from other sources, then an "insurance" system such as Phaedrus' seems like an essential strategy.

When the bear has eaten 60% of capital and another 5-10% went into topping up income, then it's a long road to recovery during a period of average market returns.

[Phaedrus]

To offer a different view, those areas of caution have provided all the best buying opportunities during the bull market........ Scary, yes it is, but rightly or wrongly i shall be commiting a few percent of my funds on monday, and if the market falls again tuesday then i will buy more.

The "overview" approach as posted here grew from my experiences of the 1987 crash. My trend-following system had worked superbly on individual stocks that I held, getting me out of each shortly after they peaked and before I gave too much profit back to the market. Totally ignoring the very significant fact that most all of the stocks I held had triggered Sell signals in a fairly short space of time, and flushed with success, I proceeded to scoop up the "bargains" that were being presented to me as the market dropped. The more the market dropped, the more I bought. This approach kept me fully invested. At the time, I saw this as evidence of my bravery, my staunchness, my independent thought. I was a contrarian and proud of it. Trouble was, the market kept dropping. The rate of fall accelerated, ending with a major retracement. A crash. I was, of course, fully invested. It took me more than 2 years to recover my losses. This was actually quite good going - a close friend took over 5 years. As bad as my losses were, the worst aspect of all this was that after the market had plunged and had begun to recover, I had no cash to take advantage of the situation. This Index based "overview" is designed to stop that happening to me again.

Also, if the market does crash, i mean really crash then it is very likely to be very sudden.

I disagree. While it might culminate in a big single drop, such things do NOT come totally out of the blue. Any major retracement begins with some initial weakness. Look again at the chart. See how drops of greater than 5% are relatively uncommon - only 4 times in 5 years. A drop of >5%, then, is clearly of some significance. Notice also that whenever the market dropped through the 5% level, it continued down and remained depressed for months. Notice how over the last 5 years there has never been a drop greater than 10%. I would therefore regard the market dropping more than 10% as a very significant event. There is plenty of warning there for those that look.

One day of course you may be right, the world may cave in, stocks may fall 50% and many companies could go to the wall . Way i look at it is if this happens we all in trouble anyway.

Not everyone! Those that exited the market when it initially showed clear weakness would be laughing all the way to the bank. At such times, cash is King.

To sum up i prefer to be brave and force myself to buy when times get ugly, its not easy, human nature means we naturally want to do the same as everyone else, to seek reasurance in numbers etc, its tough going against the flow.

The tragic irony of that statement Ratkin is that if this retracement does continue on down, you will be "going with the flow" - down the tube with everyone else!

"Those who do not learn from history are doomed to repeat it." Santayana.

[ratkin]

I see where you are coming from , difference is i am never 100% invested in stocks , yes i will be buying more as the market falls (already have been ) not buying anything i percieve as risky however. If the market does crash totally then yes to some extent i will go down with the ship , but will still be well enough off that if i had to wait a couple of years to recoup my stock losses then it wouldnt be a total disaster.
Meanwhile people will still be buying food from supermarkets , farming the land , providing electricity etc etc.

So rather than pull out in these times i prefer to exit the likes of sealegs and companies with large debts etc and pick up more bulletproof stocks , then if the market rebounds (as it usually does ) then i have picked up bargains , or if it does crash then worse case scenario is a wait to recover loses .

The people who need to worry are those investing with borrowed money , or having too many shares before they have paid their morgage etc etc.

[Stranger_Danger]

Gosh, Phaedrus was around for the '87 crash. Was anyone else?

That is what scares me about this market (worldwide I'm talking). Risk seems to be this thing one learns about in the library, in the history section. Even today there isn't a lot of fear. If you're a 29 year old fund manager and its all someone elses money, when you have you ever known _really_ bad times?

Hearing the talking heads on NZ and AU news talking about how the subprime issues in the US couldn't impact on us much makes me chortle. Almost like because we don't tend to use the term "subprime" we are unexposed to the long term consequences of lending too much money to morons to allow them to buy symbols of their idiocy.

I know of two people - both with decent incomes, large debts and no assets - who have recently been pre approved for large mortgages of the "100%" or close to variety.

Neither have bought houses yet. Why? Because despite being offered way too much money, despite the fact I can't see for the life of me see why anyone with two brain cells would give it to them nor how they'll pay it back over a full cycle, they can't find a house to their standards for that amount of money.

I see two issues there, not just one. Does anyone else?

Disc : Largely cashed up, various currency, no USD.