Monday, November 3rd, 2008
October has often been referred to as the most horrible month for stocks, and this past October was no different. We saw tremendous losses across all global markets; not to mention gut wrenching volatility that made even the most seasoned investors uneasy. This extreme volatility was the aspect of the past month that was most interesting to me and it was interesting to learn that there have been previous instances of volatility that were just as extreme.
Historically speaking, the volatility we’ve witnessed has not been normal. And after almost five years of below-average volatility levels, the past few weeks have felt even worse. Recently a closer look at volatility in U.S. equity markets was studied within a historical context.
Market Volatility Over The Century
The statisticians went as far back as 1900 to gather points of data on all instances when volatility significantly deviated from the historical long-term average (for you statistics gurus, that’s +/- 1 standard deviation from the norm). I’ll continue to refer to this anomaly as a “surge in volatility”.
As observed in the chart below, it is evidenced that aside from the past few weeks there have been four specific instances in history when we have seen an extreme surge in volatility – October 1929, February 1938, October 1974 and October 1987 (notice the frequency that the month of October occurs).
Based on a comparison of these historical periods, here are some observations:
- The increase in volatility occurs very quickly.
- In three out of four times, the market bottomed within one month after the initial surge in volatility (in ‘74, the market bottomed two months after the initial surge).
- In all but one period, the stock market was up in the 12 and 24 month periods following the surge. The exception was the period following October 1929 which stands to reason given the extraordinary economic headwinds of the era (the Great Depression).
What does this mean for investors?
If the chart is any indication, a surge in volatility may be one indication that we are seeing the “darkest before the dawn”. It’s very important to note that this analysis isn’t meant to signal that a market bottom is around the corner. Rather, it suggests that periods of extreme volatility like the one we’re experiencing today have tended to represent important turning points in the market.
Of course the standard disclosure always applies in that “past experience is no indication of future performance”, but my view is that history is all of the information that we have to analyze. Therefore, I take the stance that this compilation of information is better than no information at all.
I suppose that only time will tell if the extreme volatility in the equity markets during October 2008 was yet another indication of a market reversal.
Chart Courtesy RBC Capital Markets
Posted in Technical Analysis | 4 Comments »
Friday, February 8th, 2008
In my last technical analysis post moving averages and technical analysis, I ended by promising to show you how investors use technical analysis to make money in the stock market. That is a tall order!
First, let me tell you that there are many technical analysis strategies and indicators that traders use to make money in the stock market. In this post I will go through the basics of two distinct technical analysis strategies that are used to make money in the stock market.
1.) Many technical analysis strategies are based on momentum. That’s right, forget buy low and sell high; buy what’s going up and sell it when it goes up more. This is what technical analysts refer to as buy high and sell higher.
One popular momentum based investing style, CANSLIM, was developed by Investors Business Daily founder William O’Neill. This strategy identifies companies with accelerating earnings and revenues, along with a strong market and increasing investor sentiment (more money managers and mutual funds buying the stock).
Let’s face it, Economics 101 says that price is based on supply and demand. That said, and the average investor cannot move the price of a stock. Only the “Big money” such as mutual funds and pension funds can produce enough volume to significantly move the price of most stocks. You can learn more about CANLSIM at Investors Business Daily and see it used in real life over at Chris Perruna.com.
2) Other strategies look for reversal patterns in the charts. Some technical analysts will watch for increasing volume and stabilizing or rising stock prices to signal the reversal of a downtrend.
In markets that are downward trending, technical analysts will use price and volume, along with other indicators, in an attempt to find the bottom of a downward price trend.
Traders watching for these reversal situations will also monitor the previous support and resistance areas. If the stock has had previous support at a certain level, technical analysts will watch for that support to continue as the price drops to that level again. It is considered a Red flag when the price of a stock drops below its previous support level.
I know that I have been very vague and brief in my descriptions of these strategies. However, I always found it easier to understand when the information was explained without the jargon.
I sincerely hope that this has helped you to understand a little more about some technical analysis indicators. While I don’t use these to trade stocks, I do use some of these strategies to look for entry points to buy stocks that are already on my watch list for long-term buy and hold investment.
Posted in Technical Analysis | No Comments »
Thursday, January 31st, 2008
I recently featured a look at Potash Corporation (POT) in which I suggested that the stock was extremely undervalued and worth purchasing.
At that time, the stock price was around $120.00. Today the stock closed at over $140.00.
Yes, hindsight is 20/20 but we must learn from the past or we are bound to repeat it!
What can we learn?
Because it is such a short time period, we must look to learn more from technical analysis than from the fundamentals.
- Study the price and volume action at that time. What do you see?
- Study the price and volume today. What do you see?
- What are the differences and what are the similarities?
- The support level then was at $110.00. Do we see evidence of a new support level while looking at today’s chart?
All of these points are something to think about as we look at some elementary technical analysis indicators.
Posted in Investment News | 2 Comments »
