In December 22nd 2007, Jim Berg began preparing readers of his ‘Investing and Online Trading’ mentoring style newsletter for the possibility of a Bear Market in 2008 with a nine page article, entitled ‘Crash vs Bear Market’.
This is a quote from that article: “If the All Ords and S&P500 both have a weekly close below a falling moving average we must prepare for the possibility of a bear market. This bearish All Ords – S&P combination would be the fifth time this has occurred in the last twenty years”.
Two weeks later, we showed that the Australian All Ordinaries Index was in a falling trend and stated: “If the S&P500 closes below a falling moving average we will exit all notional trades in the notional Short Term Trading Portfolio on Monday’s Open.”
The S&P500 closed below the moving average on Friday 4 January 2008, so we closed the four remaining companies in that portfolio on Monday 7 January 2008 for a small average profit, as republished below:
Trade Entry Date Entry price Exit price Notional Profit
Stock 1 20 Nov07 $40.10 $39.60 - 1.2%
Stock 2 20 Nov07 $2.49 $ 2.67 + 7.2%
Stock 3 26 Nov07 $33.69 $34.93 + 3.7%
Stock 4 30 Nov07 $8.31 $ 7.88 - 5.2%
Mean + 1.1%
As of January 23rd 2009, the All Ordinaries Index market top was 65 weeks ago and the fall so far is currently 53.4%, peak to trough.
In Jim’s original research article of December 2007, he said it was not a prediction that we are going to experience a bear market. Nor is this series of articles to be considered financial advice. No one knows where markets are going. Common sense technical analysis is not about predicting the future but working with probabilities and reacting to price change. Common sense money management is about preservation of capital.
No uptrend will ever continue forever and no investor or trader should ever feel that they’re invincible. At any time the market can roll over and turn down, then fall for several years when a Bear Market occurs ……. or it can crash almost instantaneously. We cannot predict what the market will do.
Examination of the Australian All Ordinaries bear market falls and crashes since 1935 shows that the largest fall from peak to trough began in January 1973, when the ASX All Ordinaries Index fell by 58.20%.
It took the market 20 months to reach the bottom of the cycle, and in the 12 months following the trough, the market increased by 52.90%. Altogether it took 59 months for the market to recover to its previous high again.
If and when new entry signals are generated, we will resume our newsletter’s notional ‘Short Term Trading Portfolio’.
Meanwhile, today we revisit the same stocks which were in our notional portfolio, plus another we were featuring at that time – to examine what has happened since we were ‘stopped out’ using the systemic rules documented in our newsletter.
The following table shows a summary of the stocks above, including the last one which, while not in the notional portfolio, was being featured at that time as extra examples.
Trade Exit Price Lowest Low
7 Jan 2008 Date Price % Drop since 7/1/08
Stock 1 $39.60 12/12/08 $15.00 -62.1%
Stock 2 $2.673 1/12/08 $0.325 -87.8%
Stock 3 $34.93 16/12/08 $26.85 -23.1%
Stock 4 $7.882 1/11/08 $3.54 -55.1%
Stock51 $58.00 23/1/09 $26.41 -54.5%
(* As at 23 January 2009)
These are extremely revealing figures. They show that as of 23 January 2009, the losses SINCE we exited the notional positions a year earlier on 7 January 2008 were:
* A minimum of 23%
* A maximum of 88%
* An average of all 5 stocks of 56.5%.
This table and the sobering charts above vividly demonstrate the vital importance of using systemic stops, in addition to individual stock price stops, to:
* Protect capital
* Lock in profits and
* Minimize losses.
They also show the folly of listening to the Myth that ‘Time in the Market is More Important than Timing’, the mantra chanted by several so called ‘professional’ brokers, analysts and financial planners – to justify their inadequacies in understanding Technical Analysis. (Also, see Jim Berg’s YouTube Video ‘The #1 Myth Busted’.)
The harsh reality of the past year has been massive wealth destruction for all those investors and traders around the world who held on to falling stocks and:
* Followed this ‘Timing’ mantra or
* Did not have the education to create a proven trading plan
to exit on a stop loss or systematic loss or
* Had a Plan, but did not have the discipline to obey their own rules
As a direct result, they have seen years of profits wiped off in the past twelve months.
They will now be living ‘in hope’ for a bull market and a recovery to bring their wealth back, many not realising that they will now have to make back over 100% – just to get back to where they were a year ago.
This week we met a work colleague from several years ago. He told us that not only has his Super Fund more than halved in the past year, but also that his access to his Super (in a very reputable well known Fund) has been ‘frozen’, so he cannot move his funds if he wants to!
In comparison, those Newsletter Members who read Jim’s warning signals in December 2007 and January 2008 and decided to exit their positions have had the benefit of being in ‘cash’ for a year so far. Once the next rising market generates an entry signal, they also have the opportunity to generate their share of that 100% in however long it takes – as additional profits – while their counterparts strive just to get back to even.