- February 10, 2018
- Posted by: Choon Hong Wong
- Category: Investment
The Dow Jones Industrial Average (DJIA) and Standard & Poor’s 500 Index (SPX) both fell into correction territory on Thursday, meaning they are down 10% from a recent peak. This recent turbulence in the U.S. stock market has led investors searching for a strategy to navigate the volatility and protect their capital.
Let’s explain the possibility of this down wave
1. US stocks rose more than 5% in January, and rising continuously for the past 10 months, it also hit the biggest monthly increase since March 2016. If ignoring the down in February 2016 and the rebound in March; furthermore ignoring the slight decline of 0.04% in March 2017, the US stock market has been up for 15 months.
This situation has caught retail investors in dilemma whether to enter or not enter the stock market. Therefore, the slow rising and sharp plunging of stock market is in line with recent market description.
2) What is the trigger? Who pulled this trigger?
Some argue it is because US treasury yields have risen, this is bullshit.
In 2013, the yield of US treasury rose to 3.0% from 1.75% and the US stock market rose 30%, which is the best performance since previous financial crisis. Since 1990, the US stocks also went up when the US Federal Reserve raising its interest rates.
So the raising of US treasury yields is not the main determinant of US stocks falling.
I’ve never worried about the issue of raising interest rates by the Federal Reserve, that’s the reason I dare to say that the market will reverse its reversal in early 2016. This is because the rise of interest rates and yields represents the recovery of economic fundamentals, thus the yield bounce is a signal that the economy is going well, and so I am not worry at all about this correction.
If it is not because of treasury yields, then what?
One of the reasons could be the replacement of the US Federal Reserve the chairman. I could not 100% sure this is the reasons, but the market turmoil every time when someone new is taking the US Federal Reserve chairman position.
Overall, I believe it is the common direction transaction of major investment banks that leads to market crash. When the market crashing, it triggers the stop loss mechanism, resulting in a continuous decline of the market. This situation is similar to 20% plunge in US stocks on The black Friday in October 1987, which happened after Federal Reserve chairman Alan Greenspan took office. The main contributor of that plunge is due to programmed transactions, and the result of the market plunge eventually turned into the famous “waterfall decline effect.”
By the way, Computer-Driven Index Funds is also the cause of market turbulence. (These funds are mostly managed by AI fund managers aka robots!)
The market was relatively immature during that time, so it fell 20% in a day, and now the market is relatively mature, so the 20% falling in a day did not happen. But investors probably have terrified when the market fell 8.5% in the past week.
The market outlook
After the explanations in the first part, what kind of outlook I will give? Accumulate more of course!
Currently, the S&P 500 index stays at the position of half year, the annual figure is about 2,500 points. Even if the index is gonna falls for another 3%, I am not surprised, as this is possible.
Since the financial crisis in 2009, the S&P500 index correction range is about 8% -12%. So the current correction stood at 8.5%, if it is down for another 3%, which is 11.5%, it will be just in line with the 2500-point support level.
The market turmoil now may end this week, or it may be extended for another week, I really do not know how long it will last, but getting into the stock market and accumulate quality stock is my current strategy.
My last nagging
Global stock markets generally revised in the range between 6% to 8%, and perhaps it will continue to revise. It is the time to buy when market pulls back, this applies to every market! Now it seems that all the markets are attractive after the correction!
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