Stock Investment: What the charts say?

If you have read my earlier articles, you would have known that I am basically a value investor but I use 2% drop in major indexes on a single day as a guide to detect the start of a bearish market. Once most of the major indexes dropped by about 2% on a single day, I will take the precaution measure to raise the cash level in my portfolio by selling stocks.

On 1 August 31 US time (note that the date stamped on my article follows the US date and I actually wrote the article on 2 August 31 Singapore time), I wrote about US Stock Market Sees Worst 1-Day Drop In Months. At that point, the cash level in my portfolio was high as I have just divested a few stocks. I did not raise the cash level further but the plunge did put me on the alert mode.

On 10 August 14 US time (11 August 14 Singapore time), after a surge in the US market followed by Asian market, I wrote that, "I am making purchases selectively today as my portfolio has a high level of cash after the recent selling. However, it is still early to conclude if the market will sustain its bullishness; hence, it is good to have a balance of stocks and cash in the portfolio." I did continue to buy stocks selectively because of the high cash level.

On 22 September 2014 (23 September in Singapore), after China Shares Lead Asian Losses, I wrote, "Lately, the market has been weak. I do not have a crystal ball to foretell the future. At present, my portfolio consists of roughly 70% stocks and 30% cash. I am quite comfortable with this ratio. My short-term strategy is to buy stocks that have reasonably good yield and strong fundamentals selectively." At that time, I was on the alert but still on the selective buying mode.

On 9 October 14 (10 October 14 Singapore time), after another day of big drop of about 2% for each of the three major indexes (Dow, S&P500 and NASDAQ) in the US, I wrote that "I will activate my risk management plan to protect my capital by selling some stocks. Protecting the capital is more important than trying to achieve a high return for me. I will not sell out completely but will try to raise my cash level to about 40% and then continue to monitor the situation."

This morning, I reviewed the charts of FTSE ST All-share Index, STI, and FTST ST Small Cap index and found that the market has turned bearish by 16 September 14 because: 1) The charts show that the market rally from 10 August 14 to 14 September 14 failed to surpass the market peak on 31 July 14 in the previous rally; 2) the indexes dropped below 100 day moving average on 16 September 2014.

On 10 October 14, the indexes even dropped below their respective 200 day moving averages.

As of yesterday after the mark closed, the cash level in my portfolio has been raised to 53.6%. I have sold most of my non-core holding and I do not expect this bear market to be as bad as the 2008 GFC when STI dropped to about 1,600; hence, selling is almost over for me. I will wait patiently for the market to bottom and then pick up the bargains.

Concluding remarks: I should review the charts regularly, in particular, when the major indexes dropped by 2% or more.

FTSE ST All-share Index - 2 years