Markets have crashed recently, KLCI dropped to 1218.41 points, S&P500 fell 30.98% to 2304.93 and Dow Jones fell 33.84% to 19173.99. The contagious Covid-19 virus is spreading across the world, Europe and the US are reporting more cases every day. In Malaysia, the government imposed movement control order to prevent the virus from spreading further.
As a stock charts blogger sitting in front of the computer, I started to ask everyone including my friends to cut loss if hits 10% on 9th March. Perhaps I should have done it earlier to save more retailers from making more losses. Initially, I thought US markets were bouncing up for a strong rally, I did not anticipate it will continue to fall. As a trader, we can’t avoid losses but we can minimise our losses as small as possible.
The market does not react like movie/drama
After asking everyone to sell, a good question popped up: When to re-enter and accumulate stocks? During the discussion, I noticed many traders do not know when to buy because they do not understand technical analysis. Some trader thinks market up and down similar to those in the movie or drama, the bull market or bear market can be decided in a day trading session. For example a Hong Kong drama: The Greed of Man (大时代): a huge rally happened in a day and everyone was happy with the imminent bull market after a war had ended (I think the director wanted to show the market bounced in V-bottom shape).
A rally cannot be decided in a day trading session, just like recent Dow Jones green candle on 13th March, the gain was wiped on 16th March. You can’t rush in to buy by thinking the long-awaited bear market has arrived and it is time to buy. Conversely, you must analyse whether the market has arrived at the bottom.
So what should the retailers do now and how to re-enter into the market?
My suggestions as follows:
1.Wait until Covid-19 is under control globally
The Covid-19 outbreak impacts on the economy are the consumers are forced to change their purchase behaviours and they have to stay at home. They can’t spend money in the market like what they used to do. For example, the tourism industry and retail business are significantly affected. Other affected industries are consumer products, technology, industry, energy and so on.
That means for the next quarterly report, the companies will report reducing earning and it will upset the stock price. If you enter now, you might be risking your capital to company earnings factor which the traders do not want to see especially long term traders.
The best time to buy is to wait until Covid-19 is under control globally and the consumers start to spend money again. Bear in mind, it will be a jump in companies earning since consumers have been restricted at home for months. When they start to spend, the quarterly reports will show a huge increase in earnings.
2. Wait for retest or bottom
A few bottom patterns can be used: double bottom, inverse head-and-shoulder and V-bottom. You may check the history of the chart for a better understanding.
For example Maybank in 2009, a V-bottom occurred in Mar 2009 and Apr 2009. The high volume activities in March indicated strong demands had absorbed the stocks in the market and the price climbed slowly.
- Double bottom/W-bottom
Airport formed a double bottom between Dec 2008 and Feb 2009. Although the volume was quiet during the double bottom formation, the gap up on 13th Feb showed the composite man was accumulating and it rallied after the double bottom.
- Inversed Head-And-Shoulder
Hapseng formed an inversed head-and-shoulder between Apr 2008 and Apr 2009. The “head” occurred during the climatic sells in Aug 2008 and bounced quickly in Oct 2008. It showed the stock refused to drop and it was being accumulated.
3. Split your capital to a few positions and stocks
“All-in” in one position or one stock is a bad strategy. You should split your positions to several entries into a few days or weeks. Rushing into the market with all the capital you have might leads to a disaster if things go wrong. Manage your positions carefully and enter slowly.
Many friends asked me how many stocks should they hold or split. Some people suggest 10 stocks or even 20 stocks. To me, these are nonsenses and it’s very difficult to manage so many stocks. Besides, you don’t have a team of portfolio managers to manage your account. Let’s be realistic, my suggestion is 4 to 5 stocks that you have studied and they have growth potential.
Covid-19 pandemic has generated a huge impact on the economy in y2020. S&P500 and Dow Jones have penetrated the long term uptrend, if the Covid-19 cases continue to rise in the country, the government will take necessary measures to control the number of cases from rising. This will increase the impacts on the economy and we will see further selling on the US indexes. I reckon we should be patient and wait until the Covid-19 is under control.