“Ah, shucks. This is just another Taper Tantrum. If anything goes seriously wrong, they’ll just print a load more money.
“There’s loads of cash flying about and it means there’s going to be a massive rebound in stock prices. The big players have only just got back from the beach.
“You want to be long and strong”, say the bulls.
“We’re facing a vortex of debt deflation. Asset prices can only come down. Central bankers have run out of rabbits. Get out of stocks and hide”, say the bears.
Aaaaagh! It’s so confusing.
Who do we listen to? What’s going on? What do we do?
How to make money in any market – be right and sit tight
One of the best books on investment you will ever read is Edwin Lefevre’s Reminiscences Of A Stock Operator. It tells the story of Wall Street legend, Jesse Livermore – regarded by many as the greatest trader who ever lived.
I am not alone in having a great affection for the passage in which Lefevre (really Livermore) recalls a veteran trader, old Mr Partridge, with whom the firm was extremely unhappy because he was giving “very little in the way of commissions”.
Every time old Mr Partridge was given a tip to sell a stock so that he could buy it back at lower prices, he would thank the tipster politely, smile and just say, “It’s a bull market”. He didn’t want to lose his position.
Lefevre concludes: “In a bull market your game is to buy and hold until you believe that the bull market is near its end”. In other words, “be right and sit tight”.
Investing really is that simple. All you need to do is identify the kind of market you are in – a bull market, a bear market, a range-trading market – and then position yourself accordingly.
If it’s a bull market, get long and sit tight. If it’s a bear market, be in cash and or be short – and sit tight. And if it’s a range-trading market – put on your trader’s hat, if you want to play that game.
Over the last six years of bull market in the States simple index trackers have outperformed the clever-clever stock pickers and the algorithm whiz-kids. With all the clever-cleverness at play, the index pickers have just smiled politely, like old Mr Partridge, and said: “It’s a bull market”.
But that has changed in 2015. The trend has come to an end.
What we must now do is correctly identify the kind of market we are in and position ourselves accordingly.
Bear or bull? You can make the case either way
Is this a bear market? SocGen’s extremely articulate, but notoriously pessimistic, Albert Edwards certainly thinks so. “One key measure we monitor informs us conclusively”, he says. “We are now in a bear market.”
He shows us a key bear market predictor which registers a 99.7% probability that we are already in a bear market, and warns: “Gains that have taken years to accumulate are gone in months”.
As Investec’s Charles Newsome notes in his latest market update, when a developed market index as significant as the Dow can fall 7% in as many minutes (as it did last Monday), you know that something fundamental is not right.
The same ‘something is not right’ action applies to the S&P 500 this Monday: 499 of the 502 stocks had a down day.
But perhaps it really is a bull market?
Morgan Stanley has issued a ‘full house’ buy alert for stocks. All five of the bank’s key timing indicators are flashing a ‘buy’ signal for the first time since 2009, reports Ambrose Evans Pritchard in The Daily Telegraph. We can expect a V-shaped recovery that will deliver a 23% gain in stock prices over the next year.
These same indicators called a ‘full house’ sell alert near the top of the market in June 2007.
Meanwhile, Cam Hui’s Humble Student of the Markets blog (his timing model is excellent, by the way) notes that we have a ‘Zweig Breadth Thrust’ buy signal. I have no idea what that is either, but apparently there have only been 14 of them since 1945 and the average gain has been 24.6% over the next 11 months.
Hui also observes that bear imagery has made it onto the cover of both Businessweek and the New Yorker. That’s often a buy signal in itself.
The trend is your friend – and it’s pointing down
It’s pretty easy to be persuaded by either case. But it just means that you, the investor, walk away confused.
I like to keep it simple. I get out a chart of the FTSE 100, and I see an index that broke out to all-time highs earlier this year.
But since April it’s been steadily stepping lower. Each month’s high is lower than the last. Each month’s low is lower than the last. The rising trend lines from the 2009 lows have been broken. We have new trend lines in place that are pointing lower.
The 21-day moving average is pointing down. The 55-day moving average is pointing down. The one-year average is pointing down. The actual index price is below all of them.
The same goes for the S&P 500.
The market is due a bounce, but the current trend is down.
Sure, Morgan Stanley could be absolutely right – perhaps this is a buying opportunity. Or Edwards could be right – we should all be selling. Nobody knows.
If you want to take the Morgan Stanley approach, good luck to you. Manage your risk. Perhaps you’ll exploit a 25% rise over the next 12 months.
Me? I’d rather wait until things settle and the next trend is clearer. I’m a seller of rallies.
My inner old Mr Partridge is smiling politely and saying: “It’s a bear market”.
• Dominic Frisby is the author of Life After The State and Bitcoin: the Future of Money.
Category: Market updates