Here’s what I believe in. The markets these days are gyrating so wildly that in order to preserve capital, I’d rather stay out rather than take up risks. Whether as a trader, or as an investor, I’m confident that my cash is better. However, I would advice that intraday trading is possible. You can do this via the MACD indicator as well as watching the sentiment of all world indices, i.e. (other Asian markets and currency action) to guide you.

Before I proceed, I do have to note this excellent quote I read from Mr. Henry Blodgett’s blog. He writes “Investing for the long term is one thing. Investing for a long-term that might have to defined as ‘many decades’ is another.” I inserted this quote to explain to some investors who are “ipit” to be prepared to stomach many decades when they choose the long term route.

I wrote on Monday that Hang Seng will likely fall to 8,000 if the mental support of 10,000 doesn’t hold. A day after, the HK market rose1,580 points to close at 12,596.29 points. What does a trader/investor do? Should we get in the market now?

HK Market Recap:

The HK market on Tuesday, without any news, gapped 139 points opening at 11,154.57 and rallied to 11,700 only to fall back at 11,133.94. It proved to be a retest though, as the market rallied to close at 11,700 by lunch time and continued to go higher as much as 1,580.45 points or 14.35% up closing at 12,596.29. Value turnover was higher at HK$66 billion, compared to Monday’s HK$56 billion.

Long Term Perspective (3-5 yrs)

The price at which you buy is the single most reliable factor in your long-term return. Most fundamentalists will say that odds are good that the markets are in a global opportunity mode and that the time to start loading up on equities is now by buying through peso-cost averaging. Reading up on articles, quants (quantative analysts) agree that for the first time in a couple of decades, stocks are now relatively cheap (US, developed markets, emerging).  Now is not the time to abandon a disciplined long-term investment plan. Henry Blodgett notes that: “If there’s any good news in the global stock market collapse it is this: the farther the market falls, the more confident long-term investors can be that they’re going to get a compelling return.”

If we look at past historical data, there is one terrible caveat. From Mr. Blodgett’s study, in the three most important equity bubbles of the 20th Century – 1929, 1965, and Japan in 1989 – you will notice that all three overcorrected around their price trends by more than 50%! S&P however at 900 is still fairly valued at 1.5 P.B times. This means that if we were to fall 50% more, then the screaming cheap buys will be when S&P goes to 500 which is roughly equivalent to DOW at 5000.

On an encouraging note, economies and stocks do eventually recover after financial crises. Economies take an average of 2-2.5 years. Stocks, however, usually take about a year. Some analysts believe Q4 of this year will mark the bottom. In my humble opinion, I would not accumulate stocks whether they be in the Philippines, Hongkong, US or other emerging market bonds. My cash will simply be shifted to the USD time deposits. I will wait for 6 more months before buying. Maybe I am late, but in the markets, it’s better to be a little late than way too early.

Short Term Perspective (Intraday trading – 1 week)

I am showing the Fibonacci retracement levels that will be significant for short term traders. Note that the Hang Seng market rallied Tuesday to its 38.2% retracement level. A continued rise following good news from Wall Street could send the market as high as 12,864 (50% retracement). However, seeing how distressed our markets currently are, we can also just simply consolidate. Traders should feel comfortable buying into this market when the MACD intraday crosses down near the 0 levels. Note that it has been way overbought this Tuesday. If this is a clear reversal, there will be a retest. Buy during the retest. Don’t chase prices.