Wednesday, 15 October 2014

I jumped the gun and am now in deep water. What now for the DOW and the FTSE?

Tough blog to write this one. I have been unwell and out of action for a few days. Nothing to do with the pea and and mint pasta I hasten to add. When I am unwell I find it hard to make decisions. Instead I let things ride. This was the wrong moment to do that.

At the beginning of last week I had the impression that the pull back in markets, which had been running for a couple of weeks, would be short lived. No harm in that but my mistake was to jump into the market in anticipation of a rise instead of waiting for confirmation that the the recovery had begun. I held on, fell ill and the rest is history.

I finally pulled out yesterday, nursing some nasty wounds. Have I pulled out just as the market was about to turn? It looked as though I had as the market spiked upwards during the day. But by the end  it had pulled right back and I was glad I had decided to bite the bullet. Obviously an earlier exit would have been better but there is no point in wishing for something you failed to do.

It is a common mistake to hold on to losses because "in the long term good shares will come back". This may be true, but the long term is an indeterminate period and it may be very long indeed. If trading costs are modest and there are no tax implications it is probably best to pull out and return to the market when conditions are more favorable. This has two advantages

  • if you really are in a period of serious pull back you should be able to reenter a position at a lower price
  • by the time it is a good idea to return to the market there may be better opportunities and you can recover your losses faster by buying faster moving shares.
So that's where I am now. Next question: What does come next?

What now for the Dow?

The Dow has pulled back 6% since its high on 19th September. Its biggest fall was 340 points on 9th October but there were several other big down days. There were also 4 recovery days early on, so during the early part of the slide there was definitely a battle between the bulls and the bears. The bears are starting to have it all their own way on modestly rising volumes. 

The other worrying factor is that two diagonal support lines have been smashed and a horizontal has just been broken. If we see no recovery now the next support is 200 points away at 16111.

And what of the FTSE?

The FTSE has fallen by 8.5% since the high on 4th September. Why so much? After all the UK economy is leading the world in its recovery. That is one of the big stock market paradoxes. Strong economy leads to weakening share prices. It is not such a mystery when you take into account the fact that interest rates affect share prices. Higher interest rates, or threat thereof, mean that the returns offered by shares are reduced in RELATIVE value. If you can get a better return from risk freeish bank accounts why take the risk of holding shares?

So the FTSE's slide has been accelerated by the threat that a recovering economy will allow the Bank of England to raise interest rates. This explanation has been dealt a blow by the lower than expected inflation rate announced yesterday. But we are still in frightening territory.

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