Thursday, April 12th, 2007
Is the Oz stock market miracle almost over?
I have returned home to Australia in the fourth year of a raging bull market driven by the global resources boom.
Literally everyone I know is invested in the market and supposedly making big money.
Someone just told me that a friend had bought a two-floor penthouse from profits made investing in the stock market. His technique is to trade purely on “gut feel”!
It is difficult to quantify a situation like this, but when everyone enters the market it usually means the party is close to being over.
Of course, not being fully invested when supposedly easy money is on offer is extremely tough.
One helpful way of assessing market risk is to use Dow Theory phase analysis.
Colin Nicholson has summarised the three phases of a bull market according to Dow Theory:
1. Reviving confidence
- Fundamental under valuation (low PE ratio)
- All news is bad
- Public are absent from the market
- Market may ignore bad news
- Looks like a normal bear market rally
- Disbelief and then fear or missing out
2. Increased earnings
- Longest and safest phase to trade
- Fundamental values return to normal
- Earnings increases emerge
- Good news announced
- Each significant correction ends higher
- Employment picks up
- Sector rotation
3. Rampant speculation
- Increased price volatility
- Significant fundamental over valuation
- IPOs and new capital raisings
- Public enter the market — day traders emerge
- Computer trading systems promoted
- Media coverage increases — front-page stories
- New paradigm theories advanced
- Market regulations relaxed
- Market driven by few stocks
It is always useful to keep this list in mind to adjust risk. When the third phase is entered, and while it is tough to do, investors should probably go off margin and raise some cash.
Word Count: 273. This entry was posted on Thursday, April 12th, 2007 at 9:27 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
May 18th, 2007 at 10:16 am
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