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What are investors to do in a downtrend?

Thursday, May 6, 2010

I am a long only investor.  I do not short the market.  The blogmaster of Time to Huat has taken pains to explain to me that short sellers are necessary in the market. I understand the theory but I am still a long only investor.  Using CapitaMalls Asia as a case study, I am reminding myself of what I should be doing and hope that this post is useful to other like minded investors.

I stopped buying at supports upon realising that CapitaMalls Asia is in an obvious downtrend a while back.  Every single bullish reversal signal has failed so far. It cannot get more bearish than this.

I like the fundamentals of the company.  I like the fact that it is in a nett cash position.  Although as investors we want to exploit the discrepancy between price and value and buy undervalued stocks, we should do so when the time is right.  This is only possible when we combine FA with TA.

Buying at supports in an uptrend is the way to go.  When the trend is clearly down, what we should do is to wait and see if the next support level holds up.  We should look out for signs of a basing process.  CapitaMalls Asia is clearly still in decline and I would not add to my position in such an instance.  It has yet to start basing.

What we have to realise is that after suffering for more than a year, the tide has clearly turned in favour of the bears.  This might be momentary or prolonged.  It is futile to wonder how long this phase will last. What matters is to have the correct mentaility which is to stay pragmatic and not be too bullish or bearish.

TA tells us that a downtrend will invite short sellers.  Short sellers will come in and sell down stocks at resistance levels.  Every attempt the stock makes to rally would be cut down as selling at resistance caps gains and pushes down the price.  For long only investors, we should make use of such rallies to reduce exposure and preserve capital. Wait for that basing process and stronger signs of reversals before getting our feet wet again.

When CapitaMalls Asia started the day at $2.08, all hopes of a morning star setup went out the window. True enough, the counter went on to touch a low of $1.96 before closing at the round number $2.00. Another black candle day. MFI is still in the oversold region while OBV continues to decline.  MACD is pulling away downwards from the signal line. Using Fibo lines, we see the different support and resistance levels.

Short sellers also like margins of safety and if I were a short seller, a rebound in price to the 78.6% Fibo line ($2.13) or the 61.8% Fibo line ($2.19) would be salivating propositions.  Having been sold down relatively rapidly, a rebound to these levels is not impossible. After all, a bear market moves down a river of hope.

If I do reduce exposure in CapitaMalls Asia, this would be the second counter I am cutting loss on this year.  The first was China Hongxing which was rather recent as well. That was another case of failing reversal signals. Having conviction is different from being stubborn. The bears have left their caves and they will have their fun.


Dou said...

Like what i mention in my blog, i Never like CapitaMalls Asia. Every time i see the chart, i almost faint just like when i see Yanlord.

Good luck!! :P

AK71 said...

Hi Dou,

Yes, CapitaMalls Asia's chart is definitely bearish. Cutting loss is never fun but it is probably the pragmatic thing to do.

Royston said...

For me, there's only 2 things i may do in a downtrend.

1. Nothing.
2. Buy more.

AK71 said...

Hi Royston,

Your simple approach is appealing. That was what I used to do. Should I do the same thing again? That's a million dollar question. ;)

Hubert wee said...

I would consider getting CMA if it drops to 1.50-1.60. That is my target price within the next 12 months.

AK71 said...

Hi Hubert,

I remember you mentioning in LP's cbox that CMA at $2 would be a good buy. I replied that $1.40 would be a good buy and you asked why. I replied that it's because you don't like to buy at a premium to NAV and that's CMA's NAV. ;)

Anonymous said...

LOL. Bro. There are many reasons why people short. Someone we know came up with a truly unique reason. Back in 2008 he shorted based on FA. Do u remember?

There are some who do not like to reduce positions. They will short as a hedge.

Retail longs and shorts will rarely make much of a difference. It is the BBs that do a lot of it and they may have to, to hedge their own positions. Signs that a market is overly bear and oversold, is the rapid rebound due to short covering and bargain hunting converging. Panic buying, of sorts. This no doubt could lead to short sellers to not only cover their positions, but to reverse to long too. March 2009 was an example.

To be fair, when I buy based on FA, I don't really bother much. Take capitaland for instance, i didnt short it to hedge even though the trend is clearly down and it rebounded off major support today. I used cpf for it and I dd so for a reason, so I am not worried.

There are many things which u do far better than I do. The only one which I might have been able to learn how to handle, is emotion. I mean, try trading Jardine. Profit and loss can swing $1 each day on low liquidity and bid spread. U do need a lot of courage and a strong heart. I dont know how strong my heart is, but I am able to handle irrational buying, or selling now.
As for hongx vs CMA. if i am not wrong, u bought hongx on TA, but CMA based on FA. Wen u buy something on TA, dont become TA turn FA. Be brave. U know what I am saying?

There is very little to worry about. I dont think europe will impact asia that much. I am however looking at China to cause a lot more rattling in asian markets, than europe.


AK71 said...

Hi Charlesming,

To anyone reading this reply, Charlesming is the blogmaster of "Time to Huat" and the guy who introduced me to TA some two years ago, if I remember correctly. Time flies. He is a deep thinker when it comes to TA. :)

Bro, China Hongxing was meant to be a trade and was 100%TA. I cut it with a 10% loss when it did not deliver. No TA turned FA here. Brave or not? Hahaha.... ;)

CMA is based on FA. TA showed a fair entry price which I took. It's fundamentally sound but maybe I could get it cheaper as suggested by TA now. So, I might reduce exposure if given a chance. Take the loss and move on. Wah, see how much I have progressed? I am FA turned TA now!!! hahaha... ;)

I just met an old Uni friend for dinner tonight and spent the whole evening talking about FA and TA. So, no new post tonight. Sleepy. Will post tomorrow. :)

Dou said...

For me..average down is a NO NO for me.

If i already made a mistake to buy a stock that goes down, i am not going to send in more money to burn.

At most, i dun sell at all. Capitamall asia is a index stocks so not to worry, once index swings is gradually follow.

All the best!! hehe

AK71 said...

Hi Dou,

Yes, throwing good money after the bad is not a very good idea. ;)

However, in situations where the stock has clearly found a base and the technicals are turning up, buying more then to average down is not a bad move. Of course, always hedge and don't throw everything including the kitchen sink.

I am not sure that all index stocks would track the STI. After all, to use a Chinese saying, even the fingers on a hand are different in lengths. ;) Of course, as I am only human, I hope for the best. :)

Drizzt said...

sounds like what to do with my starhub.

AK71 said...

Hi Drizzt,

I have been paying some attention to Starhub since chatting with JW, the blogmaster of Wealth Buch. I also read your FA on the recent developments at Starhub. The charts are reflecting the concerns, for sure.

There are many who are still interested in loading up on Starhub, confident that the management will overcome difficulties. This is where, I suppose, TA will help to find a safer entry point. :)

Dou said...

lol AK71 i know u would say average down is good.

In fact Warren buffet average down as well. If he is very sure of the fundamental of the company and thus believe the market has yet to see its potential, he would buy more since "cheaper".

"When you buy stock, think of its that the next time the market opens, it is 5 years later" -- Warren Buffet

That the difference between a investor and trader haha

AK71 said...

Hi Dou,

Yes, I am primarily an investor. If the FA is good, I use TA to make decisions on entry prices.

I dabbled a bit in trading based purely on TA as well from time to time. Not really my cuppa tea. ;)

Raelynn said...

I agree with royston, when there's a downtrend, i look at the stocks that i am keen on buying and those that i have.

if the prices dont drop a lot and very quickly, i might consider buying even if it's more than my purchase price (because it shows some form of resillience??). for those who take a big dip (usually the ones that i am keen on buying i noticed o.o) , i tend to wait to see how much farther it will drop and buy when there's sign of a longer term rebound uptrend (patience patience patience).

IMO, current downtrends/reasons for downturns are not as "big bang" as the subprime mortgage crisis where it hit hard and fast where the prices that it dipped to is more or less the bottom, which is why im more cautious to wait and see.

about STI going down.. as you've mentioned previously, STI is made up of so many components, when STI goes up, it doesnt mean that the stock you buy goes up (my mom drilled this into me very frequently). vice versa, if you're not buying STI components, when STI goes down, the stock might not be as badly affected as the STI seems to imply.

AK, maybe you should do an entry on what are the current components of STI, my impression is that it is not a very "balanced" index in terms of the business that the components are in...

AK71 said...

Hi Raelynn,

Before I picked up TA, I used to do the same thing when markets went down. If only I had known how to cut my losses in the initial stages, I could have preserved capital and bottom fished. Having said this, I am still a student of TA and very experimental. So, I could be wrong. ;)

As for how prices don't drop a lot or quickly, it might just be that the counter is slower to react. I remember feeling quite smug that SPH was not declining very much in the initial stages of the last crisis but its turn came and down it went. Not a nice memory. I learned the hard way.

As for the trigger for the current correction in the market (some say it is the beginning of a bear market and not a correction... maybe), the sovereign debt crisis in Greece is just the tip of the iceberg. If you believe what Jim Rogers and Marc Faber are saying, the next crisis is a currency crisis and it will affect Asia too as we are not without economic ties with Europe and the USA. I posted my thoughts on this in a post titled "The EU and Asia" on 1 May 10.

As for doing a post on the STI and its components, I will leave that to people who understand it better and the powers that be. ;)

Drizzt said...

the problem is that if its based on TA every damn shit is starting to turn below the 200day ma. to minimise drawdowns we should be clearing all our positions lol.

a look at starhub shows that the sweet spot is below 2.14 but when its below there a safe place to look for support is at 1.90 which is a long term support.

Anonymous said...

how about using gmma to time entry instead? rather than buying at the very bottom, try buying it when a) bounce and come back to same support or b) at a higher low.

AK71 said...

Hi Drizzt,

Well, there is only so much TA can show us. After all, it is just a tool. The rest is up to us. :)

If Starhub goes under $2.00 and displays signs of bottoming, I might buy some. Would be the first time I am buying shares of this company then. ;)

AK71 said...

Hi ezinvest,

I guess you are looking for safety in confirmation of a reversal. :)

Of course, there would be a whole host of signs to look out for. A higher low is one of them.

In addition, we want to see volume expanding as price moves up as well to ensure sustainability. We want to see MFI forming higher lows too. OBV should turn up. Well, the usual technicals. :)

As for GMMA, JW of Wealth Buch uses this tool. I don't. So, I can't comment on this one. Paiseh. ;-p

Anonymous said...

AK - yeh like i said u did hongx as a trade, and hence u cut (i hope u did?). I am very proud of u. No TA turn FA. I have always been a distant (and near) admirer of your techniques and guts. A true veteran, knows what he is doing, and what he needs to do, and does it. It is fine that trading is not your cup, the point is you tried it ,so you know. AND.. you can cut. This is something I do not see in MANY retail traders. Just know that I think you have a very clear vision ahead. U had before, but now you are armed with a very powerful weapon. Catch up soon okay? Once my house is done up :P


AK71 said...

Hi Charlesming,

China Hongxing was cut once the reversal failed. Pure TA, that one. Lost a few k but a trade is a trade unlike my investments. ;)

You praise me too much, bro. Haha.. I feel the pressure now. Haha... I always have a big picture in my mind and I just plan accordingly. TA is definitely a very helpful tool when it comes to the execution. No arguments there. As with all tools, it has limitations and I am still trying grasp the finer points. For sure, it is not the Holy Grail. :)

Yup, catch up when your place is done up, for sure. :)

Oh, I just watched IP MAN 2! Wow! I feel like signing up for a Wing Chun course now! :)

Hyruga said...

China HX has reborn. And so has Capitamalls Asia. True is if you like the company's fundamentals. Its in net cash position, you should probably hold on to it.

AK71 said...

Hi Hyruga,

China Hongxing was purely a trade for me. No intention of holding.

As for CMA, its fundamentals are sound. Technically, it looks like it has bottomed. Should be safe to hold. :)

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