Four Lessons Learned from the Trend Reversal

Since August, I’m sure you have felt that the market sentiment has turned positive.

According to MIDF, foreign investors have finally returned to the local equity market after 13 weeks of ruthless selling. This is in sync with the bullishness of Malaysia Composite Index, which has stood above the Moving Average 200 (MA200) since August. Moreover, a few technology companies, such as Vitrox, Penta, Elsoft, Inari and Frontken share prices have broken new highs. The change of sentiment has indeed caught many by pleasant surprise.

On the global front, while the trade war tension appeared to have receded, suddenly the US proposed a higher tariff of 25% on US$200 billion worth of Chinese imports, causing some knee jerk reactions to the market. However, investors somehow digested this news quicker, as the market was soon stabilised. A few days later, stocks slipped again as financial crisis in Turkey sent its currency tumbling; dampening investors’ sentiment again.

However, the market recovered in a day and focused on the earning season.
With better market sentiment showed in both local and global level, should we see some improvements for our portfolio? The answer is clear:

The companies or strategies mentioned in this article are meant for study purpose only. It doesn’t constitute any ‘buy’ or ‘sell’ recommendation. Please consult your financial professional if you want to make any decision.

As we can see from our portfolio, there is a gain of 245% since November 2015. This is a huge improvement as compared to 195% a month ago. If you invested in the last few months during bad times, you are now sitting on 10-15% profits easily. So, if there were any lessons to learn from the trend change lately, what would they be?

1) Buy on valuation
When the whole market corrects, many stock prices will fall. In the first half of 2018, the correction was sharp enough to have some counters’ good valuation surface. For example, a few technology companies’ PE ratio was even hit 15 or lower, which is considered low in technology sector.

2) Invest
A few months back, the sentiment was so bad that someone even predicted that it was the beginning of the financial crisis. With that perception in mind, some investors stayed away from the market and because of that, they did not know the market condition.
Sooner, the market rebound and the trend changed, and they missed the boat. Therefore, my point is, no one could predict when the next financial crisis is. In order to become a better investor, one should keep investing even during bad times. Of course, one needs to know the company’s prospect well and manage risks. For example, if you can look for low risk (attractive valuation) and high return (fundamentals and prospect remain sound) scenario, your chances of winning would be higher.

3) Timing helps
Even though good valuation has surfaced, very few dare to buy when the share price keeps falling, as the low can go lower. So, in order to enter a trade more comfortably, one can refer to technical indication. Generally, a better timing is when the downtrend reverses, or uptrend starts especially when the share price has moved above the Moving Average 50 (MA50) or Moving Average 200 (MA200) line. Due to many illustrations required, I cannot explain every detail here. Therefore, I encourage you to attend a course on technical analysis or do some studies on this subject.
My experience tells me that if you buy fundamentally sound companies with good valuation and are technically uptrend, your chances of winning would be much higher. In other words, when the fundamental is in sync with its technical, then it’s a strong buy.

4) Market is like a Cycle
Do realise that the stock market operates like a cycle. In other words, the market will not go up forever nor will it go down without stopping as the market goes up and down like a cycle, be it big or small.
I am not asking you to invest lots of money when the market is bad, but if it has been going down for six months like the first half of 2018, do you think the market would have higher chance to come back if the economy condition still looks ok, plus the companies’ earning prospect remains bright?

Always turn on our learning mode and keep on investing. If we can always be reflective and ‘earn’ the lessons regardless of market direction, we’d eventually earn from the market.