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Friday, 8 January 2016

Hoping for some Stock Market bargains...

As you might have noticed, the stock market is throwing its toys out of the pram.

For me, and anyone else sitting in cash / out of stocks, this could represent another buying opportunity...

I'll be following my favourite long-term indicators in a test that I haven't yet had the chance to try out. They work well in back-testing, but we all know that the past is no guide to the future.

Here's a link to a chart of the FTSE100 over the past ~20 years. You should see two trend lines on the FTSE index itself, and another chart of two lines below it.

The red line on the FTSE chart is the 21 week EMA (exponential moving average). This is my "short-term" signal line. The green line is the 144 week EMA. This is my "long-term" signal line.

When the FTSE is high and falls through the 21w EMA, I think nothing of it. When it falls below the 144w EMA however, this is one signal to get out of the market. When the 21w EMA also falls below the 144w EMA, this is another, more serious warning.

The graph below the FTSE is the Slow Stochastic or SSTO. It's a moving average of the closing price vs. the opening price. I like to use a period of time between the short (21) and long (144) periods, so I use 55w and 34w. When the short-term line (blue) falls below the long-term line (red), this warns that the "pressure" is falling and that the FTSE is tending to lose steam.

Using these signals on the recent FTSE100 gives this timeline:

Jun 5th = FTSE falls through 21w EMA (no big deal)
Jun 19th = 34w SSTO falls through 55w SSTO (first hint of FTSE losing steam)
Aug 14th = FTSE falls through 144w EMA (warning sign to exit the market)
Sep 25th = 21w EMA falls through 144w EMA (2nd warning sign to exit the market)

It's going to be interesting to see how this plays out, but if it's anything like the last time these signals all appeared (2001; 2008), there could be some cheap stocks by the time it's over.

Here's how I'm going to buy back in:

When the FTSE moves up through the 21w EMA, this is the first sign of improvement.
When the 34w SSTO moves up through the 55w EMA, this is the second and final sign I'll use to move some cash back into stocks.
The final confirmation, although it's too late at this stage, is the FTSE moving back up through the 144w EMA.