What are investors to do in a downtrend?

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.

Markets are going higher in time.

In a couple of earlier posts, I mentioned that I believe the bull market we are experiencing is a cyclical bull market and that we are actually still caught in a secular bear market.  This means that the previous high set in the markets would not be bested.  So, we have to be careful once markets start testing those old highs.  A quick check against the charts would tell us that we are nowhere near those highs yet.

However, since the lows of March 2009, the markets have recovered tremendously.  The much anticipated correction has been elusive thus far but it will come and it is only a matter of time.  In such a correction, it would be an opportune time to load up on quality stocks for the next leg up. 

I would advise anyone who would like to make some money in the stock market to start drawing up a list of stocks which he or she would like to own for the rest of the cyclical bull.  Then, load up during the correction.  Buy on weakness.

We should not be overly bullish or bearish.  We should not be stubbornly holding on to any position.  I believe in being a pragmatist.  Good luck!

Related posts:

Be a pragmatist and prosper in 2010.

A new year and a new decade: Strategy for 2010.

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A new year and a new decade. Strategy for 2010.

Firstly, Happy New Year! It's the beginning of a new year and a new decade. Many countries in the world still have huge debts to deal with but let's hope things will be better the next 10 years.

This is extracted from the latest issue of NEWSWEEK magazine:

The American goverment may owe China US$799 billion but when it comes to foreign debt per capita, the US is relatively prudent. Which nationality has the highest foreign debt per capita?

Greeks US$ 27,746
Belgians US$ 27,023
Austrians US$ 26,502
Irish US$ 24,247
Norwegians US$ 21,402
Italians US$ 21,089
Dutch US$ 20,412
French US$ 18,946
Germans US$ 15,574
Finns US$ 13,617
Americans US$ 11,094
Danes US$ 9,410
Spaniards US$ 8,715
Swedes US$ 7,058
Brits US$ 6,526

Now, this puts things in perspective. Many countries are still not out of the woods. This gives the idea that we will see the global economy going into a tailspin again in the next 2 or 3 years greater credence. We are experiencing a cyclical bull in a secular bear market and not the beginnings of a secular bull market.

My strategy for 2010?

1. Gold
I am keeping an eye on the price of gold. If it goes closer to the psychologically important support level of US$1,000 an ounce, I will buy more physical gold as a long term hedge against inflation. Gold also acts as an insurance for my other investments. I buy physical gold from UOB.

2. Crude oil
I believe that demand for crude oil will continue to strengthen through 2010. However, it will not go up in a straight line. It will climb a wall of worries and we will have plenty of worries in 2010, no doubt. I would trade counters which are leveraged to the price of crude palm oil (CPO) as a proxy to the price movement of crude oil. I like Golden Agriculture.

3. Japan
As a contrarian play, Japan might outperform after almost two decades being in the doldrums. I like the Japanese Yen. I like Japanese real estate. I like Saizen REIT.

4. Indonesia
A strong emerging market, Indonesia did not suffer negative growth in 2009. I like LMIR and First REIT for the low gearings and the high yields.

5. Healthcare
There is greater demand for quality healthcare with increasing affluence and an ageing population in Singapore. I choose Healthway Medical.

6. Tourism
2010 will be a year where tourist arrivals balloon in Singapore with the completion of the two integrated resorts (IRs). Looking for value and high yield, I like Suntec REIT and SPH.

There are many other counters which will do well in 2010 but I will concentrate on these I've highlighted. The choices here are based on FA. Remember to use TA to identify entry and exit prices. Good luck in 2010.

Be a pragmatist and prosper in 2010.

Many people are still waiting on the side, people who do not quite believe in the rally, who might even be getting angry with the optimism, should just make use of this optimism to make some money. I don't believe in being overly bearish or bullish. I believe in being a pragmatist.

If you have missed the earlier river taxis, it's ok. Maybe you don't feel ok about it but it's really ok because there are other river taxis.

Position your money for growth that's going to happen over the next 2 to 3 years. Don't leave it in the bank or in a pillow or in a biscuit tin. I say 2 to 3 years because I believe that we will see another dip in 2012/2013. Until then, I am going to put my money to work.

Given the increased stability and clarity in the global economies, we could benefit a lot more if we adopt a longer time frame in our investments. Don't be too bothered with short term fluctuations in prices as the technical indicators are all pointing up and all the fundamentals have improved significantly.

I have seen so many instances of people who bought a good stock only to grow scared or impatient, letting go of their investments only to see the price forming a new high soon after. I should confess that it has happened to me too. If the trend has not changed, there is no reason to fear. A correction using price or a correction using time shakes out the weaker holders and once all the sellers are out of the way, the price is free to form a new high. In an uptrend, buying during corrections is the way to go. Of course, this is easy to say but might be hard to do. Conquering one's emotions is probably the hardest thing to master as an investor.

The STI moved sideways from August to November before moving higher. This is a correction using time. A sideways movement during an uptrend is more bullish than bearish in nature. We will see the STI moving higher in 2010, I'm sure.
Three portfolios and three counters: future gains and passive income