Sunday, June 22, 2008

How to know the bull top and bear bottom

There are many ways to predict the bull's top and bear's bottom in investment market. And normally, an investor will cross reference with different methods to determine the market trend. Technical analysis is a useful tool to provide indication of a possible top or bottom too.

I observe the market reaction to news in order to know the current position of the market in a long term trend. This simple method is useful for long term cycle, but not enough for short term cycle.

The market sentiment always react to news, announcements, happenings, rumours, etc. We can divide them into good news and bad news, and we can grade the news into 5 degree of impact or intensity.

Here are some examples of good news: good quarterly financial result, good industry outlook, positive announcement, new major development, good dividend payout, bonus issue, buying of shares by big investor, encouraging government policy, etc.

Here are some examples of bad news: poor quarterly financial result, poor industry outlook, negative announcement, fraud case, natural disaster, warfare, economic downturn, high inflation, substantial selling of shares from major shareholders or directors, discouraging government policy (such as impose of heavier tax), etc.

And here are some examples of news that can be viewed as good during bull market, but viewed as bad during bear market: rights issue, merger & acquisition, major investment in new area, increase in borrowings to fund rapid developments, etc.

And here are my observations:

During the bull market, majority investors will treat:

  • good news as reason for the price to break another record high
  • no news as if good news is coming soon
  • bad news as if no big deal (ignored)
And when it is near the bull's top, good news find difficulty to push the price with greater intensity, and the market somehow realise and react to bad news.


During the bear market, majority investors will treat:
  • good news as if no big deal (ignored)
  • no news as if bad news is coming soon
  • bad news as if tomorrow is judgement day

And when it is near the bear's bottom, the damage from bad news reduced to minimal, and the market starts to realise and react to good news.

And remember, we have to divide the news into 5 degree of impact. The market might not react significantly to 3rd degree of impact, but still react vigorously to 5th degree impact. When it reaches the bear's bottom, even high degree bad news such as recession throughout the whole region will be treated as normal; and when it reaches the bull's top, high degree good news such as 300% profit growth will also be viewed as normal.

If you can observe and predict the bull's top and bear's bottom, then you can apply your investment strategy to "buy low and sell high".

4 comments:

Sharn said... Reply To This Comment

Herm,

While IOI has rumoured its foreign exchange unrealized losses, its stock price has tank towards a super low of approx RM2/share.

With this news in regards (although EPF and IOI has made some considerable share buybacks and price has seem floated), the bear has still maintains its irrational.

So, is it safe for me say that the bear has not ended yet? .. or perhaps it is 'close'to an end.

herm ...

Thanks mate!

Rgds,
Sharn

Voyager8 said... Reply To This Comment

Hi sharn,

IOI had been overpriced with a high PE way above 20. Any bad news is good enough to bring it's price back, and it's PE has just backed to normal.

While there are many good counters with single digit PE in the current market, do not expect those still with PE above 15 to stay long at that level.

Sharn said... Reply To This Comment

Hi voyager8,

Thanks for your reply again, mate!

With your reply given above, I presume there are more to come on the oil and gas sector. Especially the oil & gas field facilitator.

Herm .. no wonder Fidelity is disposing KNM in such furious pace.

Well, call me selfish or evil if you want. I am actually hoping to 'enjoy' a more severe-downwards-market-sentiment. :p

And base on your sharing - judging bear/bull by news flow; the market is mild-ly bear which poise to recover?? ... And I don't like it.

Rgds,
Sharn

Anonymous said... Reply To This Comment

hi,

During the bull market, majority investors will treat:


good news as reason for the price to break another record high
no news as if good news is coming soon
bad news as if no big deal (ignored)

The above situation relects the present condition of the share market.Thanks for sharing.I've save this article.

best regards,
wei

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