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Identifying the beginning of a market downturn and strategies for profiting from this

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I have been reading the various opinions in the XAO thread and other international threads in regards to what we can expect on the road ahead of us. I feel this is quite a relevant topic to address a little more specifically.

The opinions are varied: some believe a small correction is needed, others believe things will continue up nicely, while others believe that we are in for a bear market. While it is unwise to listen to every opinion that is thrown around on a forum it certainly is wise to understand the factors that lead to changing market conditions and how to benefit from them in a practical way (i.e. $$$$$$$).

So the questions I pose are:

1. How do we form educated opinion on when a broader market uptrend is likely to end (i.e. what do we look for specifically?)

2. a) What is the best way to profit from this (e.g. shorting stocks, futures)?
b) What is the best timing?
c) why? (both a & b)
 

Trembling Hand

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Re: Identifying the beginning of a market downturn and strategies for profiting from

1. How do we form educated opinion on when a broader market uptrend is likely to end (i.e. what do we look for specifically?)

When the underlying one has ended. Thats is more and more stocks go from a bull phase to what could be perceived to be a consolidation to then a bear phase. Index charts are useless for finding turning points. Look at all the people calling overbought in any index up trend. They draw lines all over it and move them around..... waste of time IMO. Divergence happens as clear as day if you can look at whats under the "market".

Trick though is confusing consolidation with a sick market. Everyone wants to replay the GFC to get it right this time. Pav Ignore them. they will still be at it in 5 years,

2. a) What is the best way to profit from this (e.g. shorting stocks, futures)?

Futures enable you to concentrate on the timing and gives you pretty good risk management. Shorting stocks is problematic cus you have to also pick a loser as well as time it right. For example have a look at BHP vs CBA vs TLS over the last 3 months
 
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Re: Identifying the beginning of a market downturn and strategies for profiting from

When the underlying one has ended. Thats is more and more stocks go from a bull phase to what could be perceived to be a consolidation to then a bear phase. Index charts are useless for finding turning points. Look at all the people calling overbought in any index up trend. They draw lines all over it and move them around..... waste of time IMO. Divergence happens as clear as day if you can look at whats under the "market".

Trick though is confusing consolidation with a sick market. Everyone wants to replay the GFC to get it right this time. Pav Ignore them. they will still be at it in 5 years,



Futures enable you to concentrate on the timing and gives you pretty good risk management. Shorting stocks is problematic cus you have to also pick a loser as well as time it right. For example have a look at BHP vs CBA vs TLS over the last 3 months

Thanks TH.

In terms of question 1, something worth noting from my recent experience is that I was trading a portfolio with Tech which produced many prospects and successful ones at that, which went on with moves. A few weeks ago, a lot of stops were triggered and they were not going on with it anymore and then also fewer prospects began to appear. It became apparent that things were changing. I could feel it from the above. I personally only hold 1 position at present.


Maybe it is beyond the scope of this thread to discuss the specifics in terms of shorting futures and good setups. Maybe tying question one into this: when you feel things changing in the underlying trend, how do you go about shorting the futures? What do you look for?
 

So_Cynical

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Re: Identifying the beginning of a market downturn and strategies for profiting from

Everyone wants to replay the GFC to get it right this time. Pav Ignore them. they will still be at it in 5 years

Its a kind of non buyer remorse.

---------

To the point of this thread, i doubt that there are many who seriously anticipate turning points or spend much time on the concept of timing, the subject of timing gets very very little attention from this forum in general.

EDIT: Actually just thinking about it...the miners lead the way in the GFC finding bottom generally 3 > 5 months before the broader indexes, funny how the miners have been falling over the last 3 or 5 months...im sure its just a coincidence. :dunno:
 

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Re: Identifying the beginning of a market downturn and strategies for profiting from

Maybe it is beyond the scope of this thread to discuss the specifics in terms of shorting futures and good setups. Maybe tying question one into this: when you feel things changing in the underlying trend, how do you go about shorting the futures? What do you look for?

Well for start things change all the time but as I pointed out you have to be careful not to confuse a short term change away from a ripping bull market, which is what we have had, into just more of the same old chop chop rather than the start of GFC mark II (or are we due for III??)

But to the question. Not sure. I try and read what unfolds. To be honest I don't think we have any reason to trade a short position beyond a swing type of set up. Thats is there are opportunities here to short some indexes. Some don't look great but it depend on your timeframe. Maybe I'm trying to read too much into your question but it should be a matter of taking trades on sensible R:R and manage them as they unfold. Sometimes as the trade unfolds what was a 1 : 3 R:R turns into something more.

Also you do know I trade both ways 10 or more times a day so maybe I'm the worst one to ask. :p:
 
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Re: Identifying the beginning of a market downturn and strategies for profiting from

It's a bit like the weather.

If you are a passive observer then you will tend to rely on charts, rainfall statistics etc to tell you that there's a drought. But farmers, water managers, fire authorities and others tend to "just feel it" that there's been a change. They don't need a rain gauge to tell them that the ground is drying out, they are having to irrigate more, stream flows are dropping and so on.

Sure, the hard data has a use but it wouldn't have surprised anyone in agriculture, the power industry or anything else that's sensitive to weather that this past Summer was hot and dry in SE Australia. They'd have worked that out themselves by early January, they didn't need to wait until the end of February for official statistics to confirm what they already knew.

Much the same with the market. If you're just looking at the index (any index) and the financial report on the evening news then you're reliant on statistics alone. But if you're actively trading, or even if you simply have a reasonably diverse portfolio of income stocks that you don't actively trade, then to an extent you'll "just feel it". You notice that more stops are being triggered, there are fewer trades being initiated, the overall value of the portfolio is dropping etc. You don't need the XAO to actually roll over and trend down to tell you that there's been a change.

All that said, personally I just focus on individual stocks and ignore the index since I'm not trading the index. :2twocents
 

nulla nulla

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Re: Identifying the beginning of a market downturn and strategies for profiting from

It's a bit like the weather.

If you are a passive observer then you will tend to rely on charts, rainfall statistics etc to tell you that there's a drought. But farmers, water managers, fire authorities and others tend to "just feel it" that there's been a change. They don't need a rain gauge to tell them that the ground is drying out, they are having to irrigate more, stream flows are dropping and so on.

Sure, the hard data has a use but it wouldn't have surprised anyone in agriculture, the power industry or anything else that's sensitive to weather that this past Summer was hot and dry in SE Australia. They'd have worked that out themselves by early January, they didn't need to wait until the end of February for official statistics to confirm what they already knew.

Much the same with the market. If you're just looking at the index (any index) and the financial report on the evening news then you're reliant on statistics alone. But if you're actively trading, or even if you simply have a reasonably diverse portfolio of income stocks that you don't actively trade, then to an extent you'll "just feel it". You notice that more stops are being triggered, there are fewer trades being initiated, the overall value of the portfolio is dropping etc. You don't need the XAO to actually roll over and trend down to tell you that there's been a change.

All that said, personally I just focus on individual stocks and ignore the index since I'm not trading the index. :2twocents

+1

It isn't the overall direction that really matters to a trader. It is the oportunity presented by the volitility and spread.
 

tech/a

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Re: Identifying the beginning of a market downturn and strategies for profiting from

Must say I was un aware how many use the " Gut feel "
Method.
 
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Re: Identifying the beginning of a market downturn and strategies for profiting from

Must say I was un aware how many use the " Gut feel "
Method.
I certainly don't use it as the basis for making actual decisions, since I'm not trading the index.:2twocents
 

skc

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Re: Identifying the beginning of a market downturn and strategies for profiting from

I have been reading the various opinions in the XAO thread and other international threads in regards to what we can expect on the road ahead of us. I feel this is quite a relevant topic to address a little more specifically.

The opinions are varied: some believe a small correction is needed, others believe things will continue up nicely, while others believe that we are in for a bear market. While it is unwise to listen to every opinion that is thrown around on a forum it certainly is wise to understand the factors that lead to changing market conditions and how to benefit from them in a practical way (i.e. $$$$$$$).

So the questions I pose are:

1. How do we form educated opinion on when a broader market uptrend is likely to end (i.e. what do we look for specifically?)

2. a) What is the best way to profit from this (e.g. shorting stocks, futures)?
b) What is the best timing?
c) why? (both a & b)

1. Those who keep a pulse and observe the market keenly will feel the change. I am a pair trader and I was literally scared to short many stocks in Feb. There simply was little point. I could still make a profit if my long side rose faster than the short side, but the profitability decreased as the chance of my short side going into profit was much smaller in such a bull market. Since late Feb/earl Mar, however, the profitability returned which signaled the return of volatility. Mind you I trade in small ranges and short timeframes so I am certainly not saying it's the end of the current bull. But this to me marked a time of caution on the larger index. At a minimum many stocks are in consolidation and the ease of up moves have greatly reduced.

I am sure there are hard data / indicators that can be used... e.g. % of ASX50 below 20 day moving average.

2. These sound like trillion dollar questions and just the same as asking "How to profit from a bull market" - and you know that the answer is neither simple or straightforward.
 
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Re: Identifying the beginning of a market downturn and strategies for profiting from

Assuming we are talking about tops in stocks, nothing I've traded beats breadth.

Volatility tests well for bottoms.

How to profit is a different story. It isn't as simple as selling your longs and going short. The most profitable thing I've found is to switch strategies.

In bull markets it is easy to run momentum, sell vol, other strategies which benefit from a long decline in realised volatility.

The best strategies imho, for profiting in a stock bear are long vol strategies designed to profit from spike style movements rather than simply inverting your successful bull strategy. Mean reversion tests very well as a long vol strategy in the 1999-2003 and 2007-2009 bear markets, over the much longer term you'll find this is only a recent anomaly so it is important to be mindful of the possibility that it may not be a successful long vol strategy in future bears. The main point is to take that you don't need to be short to profit in a bear market, just need to capture volatility successfuly. This generally implies a significant increase in trading frequency over bull strategies, so you need to ask yourself whether it is worthwhile simply going to cash. If you are earning 3% in a bank deposit with 0% volatility then you can outperform by doing nothing.
 

nulla nulla

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Re: Identifying the beginning of a market downturn and strategies for profiting from

+1

It isn't the overall direction that really matters to a trader. It is the oportunity presented by the volitility and spread.

Must say I was un aware how many use the " Gut feel "
Method.

I don't use "Gut Feel" Tech. I trade a small number of shares, usualy for short term holds and returns on investment of 1-3%. I watch the charts, for these shares, for recuring low entry points and exits with the desired return. It doesn't mater to me whether the market is tracking sideways and up or sideways and down as long as there is a tradeable spread. If i'm right I take my profit and move on, if I'm wrong it is a matter of how long I'm prepared to be wrong before I bail.
 
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Re: Identifying the beginning of a market downturn and strategies for profiting from

Its a kind of non buyer remorse.

---------

To the point of this thread, i doubt that there are many who seriously anticipate turning points or spend much time on the concept of timing, the subject of timing gets very very little attention from this forum in general.

EDIT: Actually just thinking about it...the miners lead the way in the GFC finding bottom generally 3 > 5 months before the broader indexes, funny how the miners have been falling over the last 3 or 5 months...im sure its just a coincidence. :dunno:

A couple of comments:

1. I read book on the history of market crashes and the key point I took from the book was to buy “growth” stocks when the market crashes – the price will overshoot on the way down making them a decent bet. Every man and his dog goes to the “defensive” stocks (e.g. Woolworths) leaving the investor plenty of time to pick their way through the “growth” stocks to pick up the bargains. Pretty sure Sinner will have some studies on this...
2. Market timing. I have seen articles of using the spread between dividend yield and bond yield as a market timing indicator. It is all about identifying the extremes in the spread. I have been doing my own research using term deposit rates and certain stocks to look for entry/exit points (I am simpleton and believe that the 3 month term deposit is a realistic risk free rate for the average punter).
 

tech/a

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Re: Identifying the beginning of a market downturn and strategies for profiting from

PAV

As you can see many ideas on indicating a change.

T/H is closest to my ideas on the topic.
I notice that MAJOR moves are reflected in a large number
of top stocks ASX 300. I also use a bit of Voodoo. Elliot Wave analysis.
Rather than being an Elliot Purist --- unless its blindingly obvious (the counts)
I discount it. However I have found particularly in the 2008 belting that the
Counts on a great number of stocks along with topping patterns become
very obvious. Very often you will also see a clear exhaustion to the high in an
up move and a low in a down move---clearly indicating strong reversal in sentiment.

Its the Major moves we should be anticipating with the view of taking a long term position trade
in these moves. Not just the index but there have been massive opportunities in the AUD
JPY OIL GOLD and ---Property. There will be again.

Futures are the way to go for a long term position trade.
You can just roll onto the next contract for really long holds.
If we take the SPI there is (If you'd been looking for it) at least 1500 ticks since 09.
That's $37,500 a contract---so a good position hold can be a great hedge (during draw downs in a move) and a good money spinner.

But of course you need to time a top or a bottom---close enough to them anyway to be of long term use.
So with regard to that your charts should be coupled with at least a sound knowledge of Macro Economics
with the understanding of what happens to commodities and instruments of say a War in the Middle East breaks out or the Euro or US dollar come off due to ---blah blah.

Personally my timing at these points is very ordinary. i can anticipate but will definitely miss it ---the exact point.

I more than happy to have positions closed out at B/E and just lately have had 3 do just that.
In the long term timing its not an issue even if I lose a few ticks here and there.
So for me its set and re set if proven wrong. B/E is little pain getting on one is excellent gain.

My way anyway.
 

Country Lad

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Re: Identifying the beginning of a market downturn and strategies for profiting from

1. Those who keep a pulse and observe the market keenly will feel the change. .................
I am sure there are hard data / indicators that can be used... e.g. % of ASX50 below 20 day moving average.

Regardless of which hard data / indicators are used, they can not be leading indicators and at best give only a change in trend. Probably there are people here who have their own such indicators which may simply pop up a caution flag.

My view is that,

............... there are opportunities whatever the market is doing, up, down, sideways, it doesn't matter, it is a matter of picking the right stocks. Needs more work in an unsettled market, that's the only difference.
This has been a stock picking market for some months with not all the boats rising with the tide.

so the indexes I developed deliver only a cautionary message. It is a combination of such things as volatility, shares trading at highs and lows and a sort of calculation of the market sentiment. When the canary is below a certain point, I review and possibly tighten stops, pay more attention to the market sentiment overall and of each share and take more care when selecting a share to enter long. Or go fishing or take the opportunity to travel to remote areas without internet.

One such index is below.

Developing anything other than identifying trend changes, whether in market direction or market sentiment is wishful thinking, there is no such thing as leading indicators, other than crystal balls.

Cheers
Country Lad

Canary.gif
Click on the image to enlarge it.
 
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Re: Identifying the beginning of a market downturn and strategies for profiting from

A couple of comments:

1. I read book on the history of market crashes and the key point I took from the book was to buy “growth” stocks when the market crashes – the price will overshoot on the way down making them a decent bet. Every man and his dog goes to the “defensive” stocks (e.g. Woolworths) leaving the investor plenty of time to pick their way through the “growth” stocks to pick up the bargains. Pretty sure Sinner will have some studies on this...

Depends how you roll. I think what you are describing is just to long higher beta stocks. I think if you wanted to pick like this then it is necessary to filter for the growth stocks which declined the least over the last decline.

2. Market timing. I have seen articles of using the spread between dividend yield and bond yield as a market timing indicator. It is all about identifying the extremes in the spread. I have been doing my own research using term deposit rates and certain stocks to look for entry/exit points (I am simpleton and believe that the 3 month term deposit is a realistic risk free rate for the average punter).

I do not think the "equity risk premium" AKA Fed Model is a good model.

If you read the section titled "Tinker Bell" in this note http://www.hussmanfunds.com/wmc/wmc130318.htm, John Hussman does a pretty good job of explaining.
 
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