There is Always Risk

Let’s start with an analogy.

You’re standing on a footpath and you wish to cross the road. There’s a little bit of traffic. You find a decent gap between cars and you make it to the other side.

There is a risk. You might not have made it. A car could have run you over.

There is also a risk in standing still and not crossing the road. You may have missed your train and not made it home on time. And if you haven’t yet crossed the road, you’re not going where you want to go.

This analogy is true of markets. If I step in, the markets could beat me up. I could lose my hard-earned money.

What about the risk of standing aside and staying in cash?

Sure, it means I won’t lose money on a stock that could go down in price. It also means I won’t make a great deal of money, especially in a low interest rate environment. But I’ll be safe.

The satisfaction of safety, though, could be an illusion. There is still a risk. By standing still, I may no longer be going where I want to go.

What about retirement plans? Will I have enough to support myself? Could I have done better?

These questions become even more pronounced after a major event like the GFC. Events like these leave a lasting impression. They stop us from looking forward to what will happen next.

Indeed, scary events like the GFC not only stop us from looking forward. They make us look behind, over our shoulder, with fear that the recent past will repeat. The risk is we’re frozen into not taking action.

A 2015 study by fund manager Legg Mason found only 29% of Australian investors said they would take more risk in order to earn more income. This compares with 66% of investors globally.

This suggests that many Australians are more concerned about what could go wrong rather than what could go right. The problem with that is it leaves us with less wealth than we otherwise might have had.

There is simply no way of investing for a higher return without taking on some additional risk. In order to win, we must be willing to suffer a loss.

The GFC was dangerous territory. And we prefer to feel safe. Once bitten, twice shy.

But one needs to look forward, not behind. We can’t afford to look at what did happen yesterday. We need to look at what is happening today. And take a glimpse at what this means for the future.

Markets will rarely follow what is happening in the news headlines. Why? Because by the time it hits the headlines, it’s yesterday’s news.

The market has already dealt with the past and is always looking forward. Once an important low is in place, the market has digested bad news that is still to come and is yet to hit the headlines.

This is why we say the market climbs a wall of worry. The market starts going up when the bad news is still coming out. And the press keeps on dishing up bad news long after the market has dealt with it and started looking for something else.

We need to know what the market is thinking. One of the best ways of discovering what the market thinks is in a chart. In particular, look for a trend and a pattern of higher highs and higher lows.

This is like adding traffic lights to our analogy of crossing the road. Only cross the road when the signal tells you to. There’s still the risk of a car running a red light and hitting you, but we’d all agree it’s safer than without the signal.

A pattern of higher highs and higher lows is the green light in the market. It tells you what the market is thinking now and what it’s thinking about the future. It’s not totally safe, but it’s safer than being on the wrong side of the market.

Let’s look at a chart for the main US benchmark – the S&P 500 Index.

Source: Optuma
[Click to enlarge]

During the GFC, the S&P 500 dropped from 1576 to 666, a fall of 57.74 per cent. It lost a little more than half of its value.

The mainstream wonders how we shall ever be able to recover. The public sees a huge wall of worry that the market will never be able to climb. The experts warn of an even bigger crash to come.

But the chart tells a different story. After a good recovery in 2009, the S&P 500 put in a series of higher highs and higher lows in 2010, 2011 and 2012. It broke out into record new highs in 2013.

This was forecast well ahead of time by Phil Anderson, editor of Cycles, Trends and Forecasts. At the height of panic in October 2008, he wrote the cover story and lead article for MoneyWeek, the UK’s largest financial magazine. Phil told readers that things would have most certainly recovered by 2011. The stock market would be leading the way in 2010. And that we’d likely see US stock markets back into record new highs by 2013.

You can read the article in full here, if you wish.

You can see the result of Phil’s forecast for yourself in the chart above. Things did recover by 2011, and the stock market did indeed lead the way in 2010. And we were in new record territory by 2013.

How did he do it?

You see, Phil’s a history buff. He put more than a decade of research into a study of the property price cycle. Going back over hundreds of years of data, he found a remarkable pattern.

Through a study of history, Phil is able to look back into the past in order to find the future. He understands that, while history doesn’t repeat exactly, it certainly rhymes with similar themes recurring. And he knows how to read a chart for confirmation.

Go here for a brand new video demonstration of how you can use the theory to predict market moves.


Terence Duffy,
Lead Researcher, Cycles, Trends & Forecasts

Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come.

Money Morning Australia