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Friday, September 24, 2010

Coming correction because of selling - what I wrote on 13th June 2009

Posted 13 June 2009 - 12:54 AM
Many have asked me with a lingering concern of a correction.
A correction means a downwards movement after and strong surge in the market. Thie is mainly due to institutional buyers/ (YOUR! Unit Trust) funds, selling their purchase to make a profit and most times, these are made by robots or computer algorithm pre-programmed into their systems during purchase. Most of these fund managers/system, have not just research, but also some complex mathematical automaton, to calculate, suggest and pre-program a fair sell price for the sake of the portfolio's holders which is you the investor in the unit trusts.

For instance, HSBC (Hong Kong) went down to 35 HKD from a high of over 140 HKD, but all along this time there are selling and buying, by the (now not so) complex systems of algorithms and predictive calculations. So when the computer or program sets sight on on buying at 35 HKD, it has some safety threshold to pull out at a staggered level - e.g. sell 10% when gain 10%, sell another 10% when gain 20%. Buy 5% when down 15%. Note that these funds are huge: just like you were told - unit trust are funds put in by people, pooled together to make good decisive (maybe not now) purchases and investments.

So perhaps this Fund spent 100 million HKD (40 million SGD). So prices went up to 35 x 1.10 = 38.5 SOLD 10% of holdings
38.5 x 1.20 = 46.20 SOLD 10% of holdings
46.20 x 1,20 = 55.44 SOLD 10% of holdings
That's already 30% sold and prices has went up by 57%

Today: HSBC has moved over 70 HKD. Well still half of it's former 2007 glory days. BUT the computer or program were already pre-program. It's not just one stock nor one fund. It's 200 funds, managing 1000 stocks and chances are most of them buy into high profile stocks that we all know moves the market and also are part of the indexes - STI, KLCI, FTSE index. In short sometimes these "lazy fund managers" just mirror most of an index - then sets the program going automatic.

So now you have: Singtel, SIA, Citibank, big, all very big, Toyota, Walmart and 1000 other stocks that MOVE THE INDEX all going into auto-pilot. And these auto-pilot has seen prices going up and up at an accelerated speed literally - exponential in such a short time. So in effect, it will come a time when the system seems to be doing the selling at around the same time - it triggers the technical or computerised situation of a correction. The casual investor panics and sells as well. But remember the programs will set AUTO to buy when a stock goes down 15%. So when you SOLD your stock and a few of your friends too who pushed the price down 15%, the AUTO buys it in. Knowing that it had previously MADE PROFIT when it was up to the 46.20 HKD.

What did you learn from the above? The more money pooled, the more powerful you can control and make profits. A 5% gain x 40 million SGD is alot of money. So now you understand why those FUND Managers keep pestering you to invest in their 20% p.a. profit fund. (Past performance doesn't guarantee future yields!)

Back track to the main topic: so reading the signs to see why this correction is coming. CHINA SSEA up 52% since 31st Dec 2008. Canada 28%. HK Hang Seng 29%, STI 35%, KLSE 19.5%, KOSPI 28% Taiwan 51% Thai 32%, Brazil 66% Emerging Market MSCI 38%. (Page 90, The Economist 6th - 12th June 2009)

Basically not looking at previous historical highs of 2007, comparing just last day of 2008 - to current status. Most are up avg 38%.

Stock portfolio are supposed to outperform bonds(5-7%), FD (3-5%), cash (0-2%) by say 8-12%. Now it's up 38% half a year or 76% p.a. rate.

Therefore, the question you have asked me is WHEN? Humbly, my educated and researched guess is from July to Sept or should I say, between July nd Sept. Because both statements have their merits. It could be a continuous slow nosedive and nobody (the small individual buyers) seem to be able to pick up - e.g. 2 cents down every week OR if could be a major 1-5 days of spiral just like in the bad old days of Sept 2008.

Extra news:
Several Middle East funds bought into ailing UK banks etc at the downturn, some even before the downturn. Even Temasek or GIC bought some of those e.g. UBS. Selling today still make a loss. But still a smaller loss so some of them recently were sold. Some were sold too because of the imminent crash of the USD.

Comments, suggestions, thanks welcomed.
If you do write to me, kindly put in more details. Some introduction would be nice. E.g. you are starting with x amount of stocks. You are using this system. You read about Wilmar's stock news. Show some of your research. It's not quite polite or amusing if you just wrote "do you think Nokia will go up? Thanks". 

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