Last Updated on December 29, 2021 at 11:55 am
Are we now in a bear market? Can we get an idea using long-term technical indicators? In my opinion, there are two robust ways to time the market for lowering investment risk: either use technical indicators/macroeconomic indicators or use a combination of both. Starting this month, I shall be publishing a market analysis based on both types of indicators to aid tactical asset allocation.
Why do you keep talking about timing the market? I am worried? Should I time the market? NO! You don’t need to time the market (click the link for proof). I am doing these posts as a student and there is no need for you to follow them. If you are not interested, please go these recent posts if you have not:
- Why Aggressive Hybrid (balanced) Mutual Funds score over diversified funds
- List of funds that have consistently beat benchmarks with good downside protection
In the mood to watch some videos? I just published the Tamil version of How to select a credit card for maximum benefit on Youtube (this is the 5th step in Tamil on basics of money management): க்ரெடிட் கார்டு தேர்வு செய்வது எப்படி (how to select a credit card) – பணமயமான எதிர்காலம் ஐந்தாம் படி
For October 2018, I shall stick to technical indicators alone and gradually build on this each month. Initially, I wanted to publish this each week, but perhaps that might be too much too often? I am only a student of technical analysis and a pretty sceptical student at that.
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The key reason I wish to do this periodically is to find out how hard it is to make investment decisions in real time. Since the technical indicators used are long-term in nature (eg. over 200 days and not 14 days as used by traders), the conclusions and interpretations will not be identical.
In any case, the essential point is to not treat the indicators as rules of nature and recognise that we are blind men touching an elephant and must not hesitate to change our stand (this becomes easier if we did not take a stand in the first place!).
Since we are going to touch an unknown object (= the market) blindfolded, it is important to send a team with different skillsets. That is use technical indicators that tell us different things and combine them. This will be the focus.
So without further ado, let us get on with it. If you are new to this, I suggest that you first start here: Spotting Market “highs” and “lows” Using Technical Indicators
Market Analysis October 2018: Moving Averages
200-day moving average
The simplest way to spot “trend” is to use a moving average. That is we take the last X days closing price and average it. The most common perhaps is the 200-day moving average as shown below
Down-trend: when the price is < 200dma. <== Current status.
While it is “okay” to buy more when the price is < 200 dma, it may be premature to exit or book profit when the price is > 200 dma. So we need better indicators.
Double moving average
Here we use a short and long-term moving average as explained earlier. This was also backtested before (with a more thorough analysis pending): Timing the market by spotting bullish and bearish trends.
Up-trend: when the 180-day average move above the 365-day average from below.
Down-trend: When the 180-day average moves below the 365-day average from above.
Current status: Not (yet) a bear market.
Moving Average Convergence Divergence (MACD)
A potentially more sensitive method is to compute the difference between the two EMAs above and then take the moving average of the difference. The MACD seen below is the difference between the 180-day EMA and 365-day EMA. The average of this difference is known as the MACD signal or simply the signal. I have used a 136-day average.
Down-trend: When the MACD goes below its signal.
Market Analysis October 2018: Bollinger Bands
This technique helps us make better decisions with the 200-day moving average and also gives us insights on market volatility.
Bollinger bands are essentially rolling standard deviation bands for the 200 dma. The upper band is usually set two standard deviations above the 200 dma and the lower band set at two below.
Buy/sell indication With the bands reasonably spaced apart, if the price hits the upper band, it could mean an overheated market and a sell indication. That is a bearish market outlook.
With the bands spaced reasonably apart, if the price hits the lower band, it could mean a buy indication.
Current status: The price is hovering about the lower band. So it is a good time to buy more (for long-term goals).
Relative strength indicator
The simplest definition of the RSI is that it represents recent average gains divided by average losses. It is a market momentum indicator. If you look at the long-term (200 day here) RSI, a low RSI generally indicates a “buy signal”. People also look for divergences that is the difference in movement of price and RSI but I am not sure if this is possible with such a long-term average.
Nifty PE
If we must take the Nifty PE levels seriously, it is currently one at one standard deviation above the 10-year rolling average. Can hardly call this a bear market.
Summary: Are we now in a bear market?
We have looked at four different type of indicators:
- Trend: 200 dma, double moving averages, MACD. Although the current Nifty level is below its 200dma, the 180 dma is still above the 365 dma. The MACD was however below its signal last few days but moved up closer. My opinion: Too soon to call this bearish.
- Volatility: Bollinger bands. The upper and lower bands are spaced apart. Although the price has hit the lower band, the trend (200 dma) is still not down. Again too soon to call this bearish.
- Momentum: RSI. The relative strength index fell sharply but is still some distance away from previous lows.
- Valuation. PE is still well above long-term average.
All in all, I think (and I still learning this) it is not yet a bearish market if we look at the price alone. If factor in rise in oil price, inflation and interest rates, the hope that kept the market up for the last few years seems to have quickly vanished. With an upcoming election and the BJP not guaranteed of a victory like last time, it would be reasonable to say that we are on the brink of a bearish trend (if not in one already). However, markets being markets can move anywhere.
How should I invest?
I have written about this in detail:
- Dear new investor this is the best time for you to invest in equity
- How should we invest in the present market condition?
As mentioned above, this is a fine time to invest. As long as your goals are far away, I suggest that you do not wait for a further fall and invest as much as possible.
I will try and add to this in the next edition. If you disagree with what is mentioned above, do point it out.
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