Thursday, 4 April 2013

There Are 3 Stages In a Typical Bull Market

“Every truth passes through three stages before it is recognized: In the first it is ridiculed; in the second it is opposed; in the third it is regarded as self-evident.” – Schopenhauer

Typical market uptrends go through three main sentiment stages:

1) “What bull market? The fall is right around the corner”

Most of the signs of an uptrend are already here – money is leaving defensive names in order to chase higher yield, breadth is improving, correlation and volatility decline substantially. Despite of that, many people don’t believe the rally and prefer to short “overbought” names, only to get squeezed by the tidal wave of monstrous accumulation.

The fastest price appreciation happens in stage 1 and stage 3.

2) Acceptance stage

More and more people gradually warm up to the idea that we are in an uptrend and the market should be considered “innocent until proven guilty. Stocks have been going up for awhile and the minor dips were short lived.

Between stage 2 and stage 3, there is usually a deeper market pullback, which tests the resilience of the rally, shakes weak hands out and allows for new bases to be formed. The deeper pullback is used as a buying opportunity by institutions, which missed the the initial stages of the rally and their purchases push the market to new highs.

3) Everything will go up forever

During stage one, most people are skeptical, because the market has just come from a high-correlation, mean-reversion environment and most are unwilling to see the ensuing change in market character. In stage two, investors gradually turn bullish for the simple reason that prices have been going up for a while. Analysts and Strategists are also turning bullish in an attempt to manage their career risk. In the third stage, most market participants are ecstatic, not only because prices have been going up for a while, but because they personally have managed to make a lot of money. Everything seems easy, the future looks rosy and complacency takes over proper due diligence.

Edited article from

Quote for the day

"More money is probably lost by people who attempt to invest their money conservatively and sanely, but ignorantly, than is lost by those who enter into frank speculations." -  John Moody

LSL Market Review 4th Apr 2013

Market gained further ground on banking and financials mainly from smaller-capped counters. National Development Bank, Union Bank and DFCC rose further today to improve their 52-week high prices. It was encouraging to see plenty of retail activity on smaller capped banking counters. Approximately 19 million shares of Nations Trust Bank changed hands amounting around 8.2% of the issued share capital of the company.

ASI gained 25.09 points (0.44%) to close at 5,753.56 and the S&P SL20 index gained 13.74 points (0.42%) to close at 3,319.01. Turnover was Rs. 1,648.5Mn.

Top contributors to turnover were Nations Trust Bank with Rs. 1,184.0Mn, Sampath Bank with Rs. 92.2Mn and Union Bank with Rs. 67.5Mn. Most active counters for the day were Union Bank, Merchant Bank of Sri Lanka and Nations Trust Bank.

Notable gainers for the day were Ceylon Leather Products up by 14.9% to close at Rs. 79.30, Merchant Bank of Sri Lanka up by 12.1% to close at Rs. 18.60 and HDFC up by 10.7% to close at Rs. 45.40. Notable losers for the day were Free Lanka Capital Holdings down by 7.7% to close at Rs. 2.40, Tokyo Cement down by 4.8% to close at Rs. 22.00 and Central Investments & Finance down by 4.0% to close at Rs. 2.40.

Cash map for today was 65.57%. Foreign participation was 72.56% of total market turnover whilst net foreign buying was Rs. 17.27Mn.

Lessons Learned - The 1929 Stock Market Crash

Once the First World War was over, the U.S. entered into a new era. It was a time of great enthusiasm, and optimism. This was a time when great inventions, like the airplane and radio, made pretty much anything seem possible in the 1920's.

By around 1925, more and more people were getting involved in the stock market. Then in 1927, there was a very strong upward price trend. This enticed even more people to get into the stock market. By 1928, the stock market boom had taken off.

At this point, the stock market seemed like a place where virtually everyone thought they could become rich. The stock market had reached a fever pitch. Everyone thought they were an expert, and stocks were talked about everywhere. Tips were given by almost everyone.

Lesson number one: Beware when the fever pitch is high, and everyone thinks they are a master of the stock market, getting richer by the day. Beware when everything seems too good to be true, and tips are given out by almost everyone.

About this time, the Federal Reserve began to raise interest rates. Then in March of 1929, the stock market suffered a mini crash. In the spring of 1929, there were more signs that the economy could be headed for trouble. Steel production went down, house construction slowed down, and car sales tailed off. 

Lesson number two: Rising interest rates is a negative for the stock market. Also, when economic conditions begin to deteriorate, this is another negative.

In the Summer of 1929, the market surged ahead again, and all early warning signs were forgotten. From June through August, the stock market reached its highest price level ever. Nearly everyone thought it was a stock market heaven, which would never end.

Lesson number three: When the market seems too good to be true, it probably is, and at the very least, a correction is coming soon.

It is important to remember that markets do not go straight up forever. What we are seeing here is a classic example of mob psychology in full force. This is human nature at work, with the emotion of greed taking over many people. A real get-rich-quick attitude.

By August of 1929, many leading stocks were rising in price in dramatic fashion. This is called a climax run, and another warning sign of trouble up ahead for the market. 

Lesson number four: When leading stocks, after a big run up in price, make huge price gains in a relatively short period of time, this is a warning sign of the market topping.

The stock market peaked in September of 1929. At this point, heavy selling in big volume began to happen, and became somewhat common place. This is a major sign that smart money was leaving the market. There were five declines on heavy volume throughout September. All this selling was happening a full month before all hell broke loose in the stock market. 

Lesson number five: When general market declines on heavy volume begin to mount, it is definitely time to start selling your stocks. This is a major warning sign.
The Dow declined nearly 90% from its peak in September, 1929, to its July, 1932 bottom. Many people lost their entire savings, and more. Savvy traders saw many signs of trouble, and had plenty of time to exit the market, before it really started to crash. 

Lesson number six: Those who knew the market warning signs, and acted, had plenty of time to exit the market, before it crashed, late in 1929. These stock market warning signs are just as valid today, as they were back then. Always keep an eye out for these warning signs, and act appropriately.

By Gary E Kerkow
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