The market volatility since last week should be fair warning to all investors. Don’t try and market time short term and expect to come away very successful. Since last week, here are some things you could focus on which would have all given you very short term calls. The Federal Reserve was having their FOMC meeting, good news expected (no interest rate hikes). An expected National Day rally. But on Monday, after the National Day Speech, instead, because the China market crashed almost 6% on Monday and Asian markets reeled, the Singapore market was down over 80 points. After that, some investors thinking this was the end of the rally would have ran for the hills. Yet, on Tuesday, despite going through a roller coaster ride during the day, most Asian markets ended positive with the STI index up 21.74 points.
This all goes to show that daily fluctuations are so notoriously difficult to pin point its almost futile to try. I know there are certain chartists and day traders who literally try and trade intra day even. These people must have a really hard time relaxing as their emotions go up and down every day based on how markets are performing.
Let’s take a look at some numbers from the year 2007 for example.
Out of 250 trading days in 2007, a hundred and thirty five of them were positive trading days. So, based on a daily basis, there was only a 54% chance of getting a positive trading day in 2007. This is almost like flipping a coin and calling heads or tails. And this was in a year where the index was up 16.6% by year end! This shows the futility of trying to time the market in the super short term. You might as well flip a coin where the odds are concerned.
All investors want to get in at the extreme bottom of the market and get out at the very top. In practice though, its very difficult to get it exactly right. Broad trends might be foreseeable within reason, but short term daily trends are so hard to predict that its almost like reading tea leaves. Was there any fundamental reason why the Singapore STI index had to crash over 80 points on Monday? Not really. Latest Non-oil domestic numbers for July in Singapore was good. NODX rose 6.1% month on month and had been steadily improving the last few months. Was it all because the China A share market crashed?
Yet, we need to be clear as well. The China economy is actually improving, not declining, as the local China share market seems to suggest. Its 2nd quarter GDP increased to almost 8%. The key difference for China is that because that market had run up a lot already, valuations wise, it may have prompted the correction it is currently facing. The Shenzhen index is currently trading at 30X PE for the year 2009, while the Shanghai index is currently trading at 23.4X PE for the year 2009. These are high compared to the rest of Asia though they are average compared to the 5 year historical average of these two markets. The China A share market is a closed one, so it has always traditionally traded at a high valuation.
Nevertheless, profit taking can be expected and corrections are healthy. The last thing I want, would be for everyone to agree that the only direction that markets can go is up. That would actually be more dangerous than the current state of uncertainty where every single day fall is met by calls that it is time to run for the hills. There will be a time when most of the recovery has been priced in, and when this rally has run its course, but I personally think we are not there yet. So, I will be looking to add a bit more to my holdings as well in the next one to two weeks.
No comments:
Post a Comment