How falling markets present tough questions to investors

Thursday, Oct 25 2018 by
44
How falling markets present tough questions to investors

Share prices have fallen across the board in October, and it’s a reminder of just how quickly fear spreads when stocks start tumbling. My colleague Jack wrote this week about the sense of foreboding that’s hanging in the air at the moment. There’s almost a sense of inevitability that some kind of correction is past due. Knowing how to react to that kind of prospect is difficult.

Ten years into a bull run, and faced with various signs of trouble (in various parts of the world), it’s not hard to piece together a pretty gloomy narrative. While October has been unpleasant, some of the main UK indices - certainly the small and mid-caps - have been trending down since early summer. So for some investors, this experience has been less of a suckerpunch correction and more of a protracted beating.

This week the FTSE 250 has been flirting with correction territory, with the index currently down by just over nine percent for the month. As usual, the UK indices are taking at least some of their cues from price action in the United States. That’s been translating into some sharp and unpredictable intraday moves - days that start well but end up finishing on yet another low.

Profit warnings and bad news

In recent weeks the sharpest falls on the FTSE 250 have been exacerbated by bad news and profit warnings. Among the biggest fallers have been stocks like Keller, ConvaTec, Superdry, Indivior, Inchcape and Victrex. In terms of relative price strength, they’ve all undershot the All-Share index by more than 20 percent.

There are similar war stories over on the AIM All-Share, where Fevertree Drinks - a stock that, size-wise, has more in common with the FTSE 100, has seen more than a billion pounds wiped off its value since the end of the summer. It’s down from £4.23bn in early September to £3.18bn currently.

But it isn’t necessarily all bad news. It’s fair to say that some stocks (a minority) are holding up reasonably well under the conditions. But it’s also the case that investors with at least half an eye on value have been crying out for a meaningful correction for several years. For many, what we’ve seen so far won’t be anywhere near enough. As a result, we’ve…

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Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>


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73 Comments on this Article show/hide all

goodgoff 31st Oct '18 54 of 73

My view on this article? I am now even more unsettled. Should I be like the ostrich, stay invested and then see what's left in a year or so? Maybe wealth preservation should be my priority at 79 years so shove what's left in a gold ETF.

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Ramridge 31st Oct '18 55 of 73
2

The mathematician Sir Isaac Newton invested heavily in the South Sea Company and lost in today's terms around £3m.

Apparently, the great scientist took a philosophical view of his losses. He said ruefully, “I can calculate the movement of the stars, but not the madness of men.”

Of course the notion of behavioural investing came a lot later.

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Bonitabeach 31st Oct '18 56 of 73
5

In reply to post #413859

Hello Tradertimes82,

"Trading" isn't for most of us. Try "investing" instead. The AIM market is particularly risky with only a little wheat amongst the chaff.

Who do you trust? Only yourself. There are some good fund managers if you want funds but not that many. There are some good managers and management teams in companies, but the median will be disappointingly poor.

In respect of this UK market sell-off we were here before as recently as April! The "value" orientated stocks I hold have been hit too but my dividend expectations remain undiminished. I think the shares I avoided as "over-valued" have been hit hardest along with the fundamentally poor business models and the over indebted.

Sometimes it's about avoiding the losers rather than picking the winners. Investing with a longer-term outlook is much easier and more rewarding than trading short-term. I bought LON:(RDSB) at £14, I see no reason to sell at £25 while they pay me 10.75% on my investment cost. Chase shares that could double in 12 months, not today thank you; I have learned to be grateful for the 10.75% and the share price will bob up and down with the market.

Bonitabeach

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Frankyboy 31st Oct '18 57 of 73

In reply to post #412049

Well said!

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timarr 31st Oct '18 58 of 73
9

In reply to post #413874

Of course the notion of behavioural investing came a lot later.

Earlier, actually.  Joseph de la Vega wrote Confusion de Confusiones in 1688, 30 years before the South Sea Bubble.

People follow gurus without thinking:

“There are times in which the powerful investor is followed by many, even at the cost of losing money”

People seek confirmation from others (and, of course, often react violently when opposing views are offered):

“It is not important that the basic value of the shares be practically nothing as long as there are other people willing to close their eyes and support those contradictions”

People will trade for no obvious reason other than their own overconfidence:

“They will sell without knowing the motive; and they will buy without reason. They will find what is right and they will err for fault of their own.”

De Vega came up with four principles of investment that are as true today as they were then:

  1. Don’t advise anyone to buy or sell shares.
  2. Accept your profits and your regrets without looking back.
  3.  Profit in the stockmarket is transitory.
  4.  To succeed you need money and patience.

True 330 years ago, true now and, no doubt, true in another 330 years.

timarr

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mmarkkj777 31st Oct '18 59 of 73
1

In reply to post #413859

Hi Tradertimes82

Firstly commiserations on your losses, but I guess not many were completely unscathed (funds have gone down too).

I turned to cash, but not before the fall before many my stop losses were triggered, so still down around 7%, but now that I feel it was a mere correction, not an impending crash, I am missing some upside as the markets spring back (which of course doesn't mean a major fall wont happen, but nobody knows), as I start to carefully reinvest, with the inevitable dealing costs and stamp duty, etc.

Don't let the recent correction cause lasting damage to your frame of mind (your portfolio will fix itself if you are patient enough!). Its all learning and nothing should be catastrophic. One thing is to think about risk management as you rebuild. What is the worst thing that could happen? It's a phase and will pass. Strategy (stay in or get out for a while). Tactics e.g. stop losses. Maybe using a temporary short of the market as a counterbalance (then selling it again when the correction has finished). The fund £SUK2 shorts the FTSE100 to the power of 2 and can be used as a counterbalance to your long investments and you only need half the capital to have the same effect ( short term fix only, though). Look at the Stocko conservative stocks, maybe, while we are in these volatile times.

Finally, Its great learning. Robbie Burns, Jim Slater and many other fantastic investors (let alone us mortals) served an apprenticeship and lost money in their early days and everyone has spells when they lose from time to time. Its about making more on the roundabouts than you lose on the swings.

The most important thing is to be patient and not overreach. Think as much about minimising your potential losses as maximising your potential gains. Stocko tools help with this. Invest with risk management in mind and do whatever it takes to preserve a good mental attitude, or this will surely affect your investing and decision process.

If necessary, step back, take a break, have a rethink, then, if you chose, come back with a stronger strategy.

Cheers,

Mark.

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Tradertimes82 1st Nov '18 60 of 73

In reply to post #414094

Thank you for this advice, believe me it is much appreciated, I certainly needed to read another perspective.
Thanks again for taking the time to reply.

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Tradertimes82 1st Nov '18 61 of 73

In reply to post #413919

Thanks for this, another great reply. Yes I am strongly considering whether investing is for me. I thing I need a rest as Markj777 suggested and I take on board both your comments as I attempt to stumble forward.
Thanks again for taking the time to reply.

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PhilH 20th Nov '18 62 of 73
6

In reply to post #412774

I've increased my position on my DAX short today by 50% due an increasingly bearish weekly Ichimoku Chart. Things that triggered it for me were the price hitting new recent lows (intraday and daily close) and  also note everything is pointing south, i.e. the slow and fast moving averages, the boundaries of the cloud and the lagging line

5bf47b0d30631dax.png


If the FTSE 100 drops further tomorrow increase my short on that position too. Ideally I'd be looking for new lows (below 6850) and another lower close (below 6984). 

Professional Services: Sunflower Counselling
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PhilH 21st Nov '18 63 of 73

In reply to post #412264

Hi dfs12,

The fantasy fund league is interesting but you need to dig a little deeper when looking at the results.
Many of the top funds run by subscribers have erroneous spikes in their value due to incorrect handling of share splits.

That said if you look at the 3 year returns active fund manager shipoffrogs has very good returns.

Best of luck
Phil

Professional Services: Sunflower Counselling
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PhilH 6th Dec '18 64 of 73
2

In reply to post #420539

Well it took a little longer than I expected but I've increased my short position on the FTSE 100 by 50% today. The way things are heading this week we are looking at the lowest weekly close in 2 years.

I'm still not short on the US markets and personally if they are going to go south I'd be much more comfortable shorting them in a couple of months time. For example to short the DOW as of today I'm looking for a weekly close below 22188 which is currently 2300+ away. So by the time I'm ready to place my short the big moves might have happened. However looking forward in February 2019 I'd be looking for a weekly close below 24148 (442 pts difference) or in March 2019 the price could close around the current level.

Anyway interesting times ahead and whilst Trump is in play there is going to be a lot of volatility so be careful out there.

Best of luck
Phil

Professional Services: Sunflower Counselling
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PhilH 17th Dec '18 65 of 73
3

The US charts are starting to look hairy now ...

S & P 500

5c181ebc254e3sp500.png


Last week's price action close below the cloud and this week's price action is pushing into new 9 months lows and the lagging Chikou is wandering into the cloud. The moving averages that form the cloud are poised to cross turning the cloud Bearish. Even if the price action consolidates at this level it'll be 5 weeks before the lagging line falls out of the bottom of the cloud. Closes below 2500 don't look that far fetched over the coming weeks and that's going to take the lagging line below the cloud and if that happens for two consecutive weeks that'll be my signal to go short on the US market.

S & P 600 Small Cap

5c18231e48569sp600.png

Today's lows were a 14 month record and the lagging line is sitting in the middle of a thin cloud (limited support). The cloud is about to turn bearish too.

Be careful out there!

Phil

Professional Services: Sunflower Counselling
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Carey Blunt 7th Jan 66 of 73

In reply to post #428193

Hi PhilH,
Did you ever get to the point of shorting the US markets?
Carey

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PhilH 7th Jan 67 of 73
1

In reply to post #433313

Hi Carey,

I've come close to pulling the trigger. I'm looking for the blue lagging line to close below the cloud for two consecutive weeks.

5c334608d1849spx.png


I think the outcome of the China trade talks are going to push it one way or another but I can't decide which way it'll go at present.

Best of luck
Phil

Professional Services: Sunflower Counselling
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finchy 15th Feb 68 of 73

In reply to post #433333

Phil,

Curious on where your sitting now with your UKX market short given recent "recovery". Additionally what approach / instrument do you use for shorting? If ETF does the daily rebalancing negate the "true" expected return?

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herbie47 15th Feb 69 of 73
1

In reply to post #433333

Just as well you did not short it, S&P is up 17% since Dec 24. Even the FTSE100 is up 10%. I think it is difficult to predict which way the markets will go but I'm still quite negative on the UK in the next few months, I'm more in cash now.

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PhilH 15th Feb 70 of 73
1

I'm still sat on my shorts for DAX and FTSE. With everything that is going on I'm in no hurry to close them. March is looking interesting both in terms of Brexit and US/China trade negotiations. Given that Trump has had to cave on the wall legislation and that he'll face legal pressure if he tries to invoke emergency procedures I'd suggest that he'd be looking for a good result regarding the US/China talks. I think he'll want to appear tough. But aside from that the shorts hedge my portfolio at present and although the performance of my investments has been flatish, I have a good insurance policy against some very real headwinds.

Best of luck
Phil

Professional Services: Sunflower Counselling
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PhilH 15th Feb 71 of 73

btw my preference was that the US market held out until march time before capitulating as entering a short position at that time would mean that my other investments wouldn't have been eroded by a wider market collapse,

i.e. it's a bigger drop from Decembers SPX chikou (value appears in May in the charts as it lags) to the bottom of the Kumo (for two consecutive weeks) compared to Mar's SPX chikou to the bottom of the Kumo.

I've tried to highlight that below in Orange


5c66d700b4cd2spx.png


Professional Services: Sunflower Counselling
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PhilH 15th Feb 72 of 73

With the FTSE, even after the recent rally it is still Bearish. My exit strategy is two fold. I'll exit either when ...

  • Blue TenkanSen (fast MA) crosses Red KijunSen (Slow MA)
  • Flourescent green stop loss is broken by price action. The stop loss is the KijunSen displaced.
5c66db1f08f9dukx.png


The DAX weekly chart is still very bearish. Same exit rules apply


5c66dcb4e418fdax.png

This is very much my own strategy so please do your own research. It's quite likely that I'll lose money on the shorts but that'll mean that the market has rallied and my other investments should do well. In the meantime I have an insurance policy against something very ugly.

Professional Services: Sunflower Counselling
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finchy 24th Apr 73 of 73

In reply to post #448653

Phil,

Where are you sitting now a couple of months on?

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