We are living through a period where there seems to be only bad news and no sense of when it may end. But end it will, eventually.
Markets will take off again and greed will replace the fear that currently grips so many investors.
Let’s consider some possible scenarios for 2012.
Last week I posed the questions: Should you sell or buy at the moment? Or do neither? In short, I don’t think this is a time to be buying.
Whether you sell will, of course, depend on when you bought. I have a couple of simple rules-of-thumb regarding selling, which have worked well and indeed took me out of the market in January, 2008. At that time I was using a simple ‘break of trend line’ rule, which I have discussed in previous articles in Trading Tutors.
I also apply the ‘sleep test’. Not very technical perhaps, but if a market runs very hot and hard, then instinct tells you it is going to correct sharply. This was on my mind every night in late 2007, so I got out.
Another of my rules re stocks I am holding is to ask myself if I would buy more today. Often the answer is ‘no’ and this means I am no longer a fan, so I sell. My decision to sell is also based on how long I have held the stock and how the daily, weekly and monthly charts are looking.
I also constantly spring clean – culling stocks that have run too far or that have not performed. I especially do this in the post-Christmas rally so I can go away on holiday in peace.
I can’t cover every exit strategy in detail in this article but if you would like me to explore these in further detail, please write and let me know which particular aspect you are interested in.
So would I buy at the moment?
In a word - No. I expect the bad news to continue for a while and I am not yet convinced we have seen the final capitulation, when the masses finally surrender and sell in panic. There may not be total bedlam but we will see further shakeouts.
Events sometimes have to reach a crisis point before rational thinking takes over. When I see people still rallying against austerity measures in Greece, it tells me the European woes are not yet over. The Greeks will eventually have to face up to the reality of their situation and there is more pain on the way for them. There could also be further defaults in Europe.
The charts do not indicate any serious downward pressure on the local bourse but I want to see more data before I am comfortable we have reached a significant bottom. As soon as I do see this I will be straight to print in this column. I do not dismiss the prospect of a move lower to 3,300 in the coming months:
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This level could bring a lot of interest back to the market and perhaps provide consolidation around this level, which has been an area of support over the last decade or so. Following this we could see the market make its next long move up:
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The 210-month Elliott chart above suggests a high of around 8,000 as a wave five move over several years. There is no rush to get on board as there will be much oscillation along the way.
When acceptance of bad news becomes the norm – and we are tending towards that now - it is time to adopt a contrarian view. Many investors will be asleep when the move up comes – perhaps around the time when those who bought high eventually dump their stock in frustration.
Do not turn your back on this market – there are plenty of surprises ahead!
Enjoy the ride