Every so often it is good to stop and look around, to stand back and stop squinting our eyes so that we may see the bigger picture. We find ourselves becoming so focused on what is happening in the market at this very instant and how it is going to affect the next 2.5 milliseconds worth of price action - or what the next big winning trade is going to be - that we all too often take our eyes off what it is that actually drives the market. Well, that too is debatable if you think about it, although what we are referring to is the trend. The long term, bigger picture.
Now at this stage we are supposed to express an opinion about whether we are in a Bull Market or not. We say this; have a look at a weekly ALSI chart and you decide for yourself. To make it a little easier for you, there is just such a chart below.
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| ALSI - Weekly Chart |
As you can see from the chart above, there is a strong uptrend in place. Worthy of noting is that the channel in which the ALSI (JSE Top 40 Index Futures) is trading now has been intact since the end of the recession in 2009. This is clearly a long term trend then, and long term trends tend to stick around for long periods of time, hence the phrase 'long term trend'. So what does that not-so-witty babble mean? you might ask. We'll get to that in a moment, lets continue to look at the weekly chart above. You will also notice that the 89 Moving Average has tucked in below the price line (candles in this case). This indicates that the trend has changed from bearish to bullish. Again, this is old news, it happened in 2009 so why is it important now? Alright, let's now look at some more recent events. Notice the rather steep upward movement over the last, let's call it, 4 months? Notice how this is accompanied by reducing trade volumes as well as bearish divergence on the stochastic oscillator? These are the precursors to a correction phase.
So now, we've made a bullish and bearish case on the chart above. Although what should be pointed out is that the 'bearish case', as one would call it, is a lot more 'short term' than the 'bullish case'. What the chart shows is that the immediate rally over the last few months might be reaching its top. Does this mean that we should all furiously start short selling ALSI contracts until our ears start bleeding purely from over-exposure to clever derivative products thrown around by unrelenting market forces? No. What it means is simply that, by looking at the past behavior of the South African market, we could be entering into a consolidation phase - that might last a few months - before the overall trend continues to push higher.
So, that being said it is important to understand that the past does not always repeat itself and when looking at these charts and news coming from around the world, we can simply try to interpret the signals as best we can. Is the market going to trade up and test the top of the channel before it corrects? Certainly we would all love to see that! But what if it comes off a little first, to make sure that the support indicated by that bottom trend line is still there? The outcome of the next few weeks, days, hours, minutes, seconds... the closer we look, the more difficult and unpredictable -even random - it becomes so why try to predict it? Why not simply say that we will know when it gets there?
Our job is really simple. We who trade the markets; we really have only 2 very simple things to do. First; follow the market. Don't predict it, don't anticipate what it's going to do, don't even dare start hoping that it is going to do something that you want it too. Just follow it. Second; and probably the more important - and difficult -one of the two, is to take advantage of the opportunities the market give us. To act in our own best interest. To search out opportunities that will allow us to grow our capital safely and when we find these opportunities, to take them. It really is that simple.
So when Draghi talks of the European Union's slow growth and various stimulus options based on certain conditions, or that they hope to keep inflation below 2% while keeping interest rates at 0.75%. When we read and hear about the severe situation in Greece and how desperate those poor people are becoming. When we hear about 'the fiscal cliff' on an almost daily basis. It all sounds as if the market is ready to fall at any given moment. It sounds like the world is on the brink of disaster and yet, it's not. This is the cyclical nature of life. So instead of trying to pick the top, or trying to predict what is going to happen next, rather sit back and say; wait a minute, this market is trending up... so if it falls, I should be ready to buy the very best shares available on the market so that I can really grow my capital base as efficiently as possible.
The trick is now to make sure that you are buying the very best shares available on the market. Some of them have been mentioned on this blog before and surely some more will come up in future (although let's face it, our clients will know long before we let the public know). Looking at the shares that we have discussed on this blog, the results speak for themselves. The real magic in the stock market is not knowing what is going to happen, or being the best aggressive trader, no. The real magic is in how you valuate companies and basing your buying or selling decisions on that valuation. We might have said this before, but we'll say it again. Ignore the noise and buy a good stock at a good price.
To summarise the above, we have established that in the shorter term, the probability of a market correction is getting higher and higher although exactly when it is going to happen, we cannot nor will attempt to say. It could be as early as tomorrow, it could only start in February next year. In the longer term though, the trend is still bullish and until that longer term trend is broken, we will continue to be bullish. We also spoke about finding value in the market, or finding undervalued shares and ignoring the shorter term noise that does so well at distracting us from what it is we are really trying to achieve; the creation of wealth.
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