Don't Bargain Hunt! Don't Rush to Buy In!
Posted by Book Eater
January 17,2008
Reference: Steven Li, CFA - JPM's study on the HK Market
The HK Market fell miserably yesterday , more than 6% in just a day. With this kind of drop, perhaps everyone's asking... should we bottom fish now? For all these questions, I think it will be helpful to read this historical study made by JPM whether bottom fishing after a 20% correction will work.
From 1990 to the present, there had been 16 occasions when the HK market experienced 20% corrections. Yesterday was the 17th. These corrections usually have an average of 61 calendar days. The most recent that HK market experienced is a 78 day correction. From the high on Oct. 30, 2007 at 31,638 to yesterday's close at 24,451, we would usually have to wait for another 26 calendar days before hitting the trough. On average, the market would decline a further 9% vs the peak.
Historically this strategy of your bargain hunting would have resulted to an average of 4% rise in 3 months, 8% rise in 6 months. While this may not seem such a stellar return, note that this is just an average.
On those 16 occasions, aberrations exist : From August 7,1997 to October 15, 1997 , it fell 22% and 21%, 3 months and 6 months respectively. There were returns of 36% after 3 months as well during the 1998 crises.
Lessons Learned from History:
It pays to buy after corrections of 20% or more, but you don't have to rush to buy in. On the average, wait for another 26 calendar days for it to bottom out. Of course, 26 days is the average, just look for the reversal signs and position. Stay on the lookout and watch.
Impacts on the Philippine Market:
It's 10:32 am now, I already liquidated my BRN. Sigh, oh well, we have to be disciplined traders. So that we can survive and trade again. There are buyers on MBT at 43 pesos nowadays. Still, no one dares to buy and catch these falling knives.
Most of the stock issues are breaking their support lines. Looks like it's true to just stay on the sidelines, raise cash.
Your risks today are many- liquidity risk, sentiment risk and sales volatility risk.
When everyone talks about tsunami selling on the street. You do have to ask yourself...where we are in the bear bull market cycle.
We are on the right side. We haven't even bottomed out and consolidated.
- Nix