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Are we getting close to market correction?

Discussion in 'Shares' started by Maverick, 30th Mar, 2006.

  1. Maverick

    Maverick Well-Known Member

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    Hello,

    I’m wondering if anyone can remember any signs/symptoms from a year ago when we had a decent market correction. I wasn’t following the market at the time and I do not know what was the actual correction (10% or more?) and for how long it lasted (1 month or so?).
    But I have a feeling that we cannot go too long with new record highs and a correction is just a meeter of time. I personally think (and this is not based on any calculated projection) that we are close to some sort of correction, even though the fundamentals are good at the moment and other markets (US, Japan, etc.) show positive lead.

    So, are there any signs (indicators) in the market that would suggest (help to find out) that a correction is about to happen?

    Thank you.
     
  2. Tropo

    Tropo Well-Known Member

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    "I’m wondering if anyone can remember any signs/symptoms from a year ago when we had a decent market correction".

    For the last 3 years market is moving up almost non stop.
    Where did you get last year's correction from ??? :confused:

    Some "events" leading markets to corrections:
    - when you are receiving prospectuses for companies which are involved in bizarre activities (eg.search for a rare metals)
    - a growth in the number of economic commentators who say the boom should last forever.
    - a high level of new magazines dealing with the stock market and "gurus" selling fool-proof trading systems.
    - everybody thinks the market is going up than on the contrary, there is a chance it will go down.
    - everybody talking about correction, than the market is about to go up.
    - easy money (credit) for speculation
    - getting tips from neighbors/ taxi drivers etc.
    - not many short sold positions. This is a contrary indicator since the crowd is wrong most of the time.
    :cool:
     
  3. Maverick

    Maverick Well-Known Member

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    Hi Tropo,

    I may not characterize the 2 month period from 21/03/2005 till 17/05/2005 correctly, but I think this is what it was referred as in media - “correction”.

    Attached is a graph (from S&P for ASX/200) and excel file with the data.

    Regards.
     

    Attached Files:

  4. Tropo

    Tropo Well-Known Member

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    Nice graph......What you see on this graph is a pull back (approx.310points). - NOT correction !!.
    I wonder what media said about Sep/Oct 05 pull back (368 point). Was it a crash ???? :rolleyes:
    I discovered long time ago that any media comment should be taken with a bit of salt, pepper and chilli as well. :D
    :cool:
     
  5. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Bring on the chili! I bought a bottle of tabasco on Sunday, it's nearly finished already and I'm the only one that uses it.

    Mark
     
  6. Tropo

    Tropo Well-Known Member

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    Hahahaaaa.......What a shame... ;)
    Do you know that, tabasco + bottle of vodka = Breakfast of Champions :D
    Try one day before work... :p
    :cool:
     
  7. Maverick

    Maverick Well-Known Member

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    Back to the original question...

    I guess the reason to ask my question at the first place was that I wanted to know if people with more experience in investing in equities do find signs of the market turning the opposite way early enough to not loose most of the gains made in the recent months/years.

    But maybe my whole approach is wrong. I can see some issues myself.
    Firstly, many people on this forum are strong believers that it is impossible to predict the market. This is the reason many (most?) of us invest in Navra fund, which uses reactive approach, rather than proactive.
    Secondly, investment is about long term objectives and not short term, which is really what my question was aimed for.

    Nevertheless, since this site is about education, I still hope I will be able to learn from this forum if it is possible not to loose money in short term by taking some profit/pulling back from the market before it drops, even in short term (e.g. 310 – 370 points.).

    Thank you.
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    My approach is to set a target value for each of the funds in my portfolio. When the fund value reaches a predetermined percentage above my target value, I sell down enough units to take it back to the target. If the fund drops in value to a predetermined percentage below my target value, I endeavour to buy more.

    Of course, if you are still building your investment into that fund, this won't really work - I only do this for funds where I've decided not to accumulate any more in that fund just yet (usually because I'm building up my investments in another fund).

    Example: say I decided to limit my investment in the Navra Australian fund to $100,000 (because I was wanting to invest in the Navra American fund !?) ... and growth has taken the value of the fund to, say, $110,000 ... then I would sell $10,000 worth of units and invest that money elsewhere ... realising some of the profit and locking it in. If the fund continues to grow, when it gets to $110,000 again, I will repeat the process - selling $10,000 worth of units and investing the money elsewhere.

    If the fund drops down to around $90,000 - I will then (depending on whether I have spare cash to invest, or whether I'm committed to putting money elsewhere instead), I will buy a further $10,000 worth of units in the fund.

    The trick is to understand that during the quarter, not all of the increase in unit price is from capital growth - some of it is from trading profits, which will then be distributed.

    If the fund has gone up by 5% for the quarter, and distributes 3%, then 2% is growth. Selling off units at a profit just before the end of the quarter is not a good idea - unless you prefer to pay CGT rather than income tax (which may actually be the case if you have an outstanding capital loss !!). So I'm careful with my timing ... I'll usually wait until the beginning of the next quarter before taking any action.

    I guess that's a pretty long winded way to say ... yes, I do take profits ... but it's not because I expect a downturn anytime soon ... I'm not predicting the market - I'm just balancing my portfolio and taking some profits as they come.
     
  9. Glebe

    Glebe Well-Known Member

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    Hi Maverick,

    If we're speaking generally, you can predict the market by assessing the fundamentals. You don't have to pour over the accounts of companies, just keep abreast of market PE ratio's and general profit announcements. If valuations are too high you can bet there'll be a correction sooner or later.

    But pullbacks are a different story. They don't so much represent relief from high valuations, but greater demand from people who want to lock in existing gains than from new money wanting to buy in. If the fundamentals are sound these pullbacks represent great buying opportunities.

    But to answer your question more directly, I can't predict pullbacks however nor do I intend on trying to predict them. I'm holding for life. Congrats to those that can - but to try and sell, then buy again when the market has dropped 5-10% sounds like a game for fools to me!
     
  10. Glebe

    Glebe Well-Known Member

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    Hi Sim,

    I would have thought it's better to have a CGT event than more income since in many cases the gain is halved then thrown on top of your income anyway. What am I missing?
     
  11. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Depends on your situation Glebe ... in my case I hold units in a discretionary trust, which carrying forward a loss made in the early years of the trust. If I take a capital gain now, I have to distribute it and pay tax on it, whereas income is offset against the existing loss, thus no tax payable on it.

    The reverse would be true if you were carrying forward a capital loss, but your trust was profitable ... you might prefer a capital gain rather than income.

    Perhaps I should have worded my previous post differently ... "Selling off units at a profit just before the end of the quarter is not a good idea in my current situation" !! :D
     
  12. Maverick

    Maverick Well-Known Member

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    Sim,
    Thank you for the explanation.
    I have thought about taking profit and balancing the portfolio, but have not formed yet my plan/strategy of how to do it. Your example gives me good starting point. This is exactly sort of things I was looking for.
     
  13. Maverick

    Maverick Well-Known Member

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    Glebe,
    I agree with you and I wouldn't be looking for some "opportunities" around the pullbacks, if I could have a more holistic view on the investment process and not be concerned with short term losses.
    I have just started another thread which is supposed to put things in perpective by helping to define long term performance targets.
    What is your performance target?
    Appreciate your help.
     
  14. Tropo

    Tropo Well-Known Member

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    Maverick,

    Some people are trying to predict the market and from time to time they are lucky.
    But it does not mean that they can predict the market consistently , and most of the time they are wrong.
    The only way to protect your profit or survive in the market is a good risk/money management system and entry/exit, stop loss/profit rules.
    It's nothing wrong with the long term objectives and taking profits in the short term if possible.
    To be able to do this (if you are hands on investor), you need a good system with strict risk control rules which works most of the time. Your risk is the only thing you can control in the market.
    Investing in Stock Market has NOTHING to do with predictions or guessing. It's a hard work which require a lot of knowledge and experience. So, before you put your own money on the line, would be a good idea to get some basic knowledge about investing in equity.
    Exit the market at the right time is the most difficult "trick" of all. Problem is that you do not know how deep market may pull back and when it will pull back up again. In this case taking a profit, would be a good idea ( imagine that you bought Telstra shares around $7-$8 approx 6 years ago - now at $ 3.80 :mad: ). After all, you can always buy it back on the way up.
    :cool:
     
  15. Maverick

    Maverick Well-Known Member

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    Tropo,

    I fully agree with you. Which is why I have abandoned my idea from a couple of months ago to trade shares - I just do not have the skills (yet :) ). So at the moment I trust a couple of Fund Managers (including Navra) to manage the money on my behalf.
    I guess my nature of being more proactives gets in a way, which is why I ask all those questions. But the real reason, as I'm starting to realise now, is that I just do not have yet defined strategy, which I could stick to.

    Tropo, I really appreciate your contribution to the forum and always find your posts very informative. Thank you.
     
  16. Tropo

    Tropo Well-Known Member

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    Glebe,

    Weakness of the fundamental analysis is that it is very difficult to formulate a model to accurately estimate intrinsic value. Fundamental analysts generally assume that market behave rationally, which often is not the case. Market is made up of many opinions of intrinsic value, and that price is a consensus of those opinions.
    It's a lot of cases when PE ratio is low or very low, profit announcement is O.K. and stock price is going down.

    I hate to say that, but holding stocks for life it's a very dangerous approach. Nobody can guarantee that shares which dropped in price say 10% - 20% will rebound in the future.
    Can you imagine how might feel all those who still hold HIH shares ?
    :cool:
     
  17. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Even Telstra shares are a good example ... how many people bought T2 shares and are still holding them hoping that they will eventually make money ? Sure, the dividends go a fair way towards offsetting the costs ... but the opportunity cost of having a share drop below your purchase price for years and years - is quite significant.

    Telstra yields might look attractive at today's prices ... but when you paid T2 prices - the yield is nowhere near as attractive!
     
  18. Tropo

    Tropo Well-Known Member

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    ....and what is even worse, T2 instalment price may never be hit again....
    :cool:
     
  19. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Hi Sim',

    Just wondering if you could (if you want) relate your thinking in selling down your funds if they go above a certain value. I mean, to my way of thinking, I don't understand why you would do this, particularly if you feel the value will continue to rise?

    The way I see it, it's like you're shooting yourself in the knnes by doing this. Obviously you have a strategy in place and reasons for doing what you do, just wondering if you might be willing to elaborate on those reasons.

    In my mind, I would be more inclined to let my winners run.

    Mark
     
  20. Tropo

    Tropo Well-Known Member

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    "In my mind, I would be more inclined to let my winners run."

    OR: Let your profit run (as long as possible) and cut your losses short.
    That is the way to go :D
    :cool: