On October 29, 1929, Black Tuesday hit Wall Street as investors traded some 16 million shares on the New York Stock Exchange in a single day. Before buying a stock, you should already work out when to exit a stock if things do not go as planned. Note down the current market trends and any unusual market action and prices you observe on that day. Many times, the local market is always affected by overseas markets, and global events that are happening. Do not put all your money on a single trade even though you think that stock is going to make money because nobody can tell what is going to happen tomorrow. Stop loss orders can prevent all your capital from reducing to nothing in the event of a market crash or price crash.
Always work out the percentage of risk you are willing to take before buying and be ready to exit the market when or before the stop loss limit is reached. Notice that the recent market bubble and burst aren’t as severe as the 2008 crash, in which the Shanghai composite lost about 70% of its value from peak to trough. Bottom line: whatever collateral damage a Chinese stock market crash might do to the US economy is almost certainly already priced in at this point. In my last post I introduced a stock market trading strategy based on my 6 month market forecasts. The big market call of major likely declines made for most of the difference in performance.
It turns out that the forecasts consistently lead the market by a couple of months, so actual trading works best not by following the most current forecast, but by using a lagged forecast that weights forecasts from a few prior months. In particular, the forecasts of 2008 through early 2009 screamed of likely 6 month market losses of 17% or mort months before the crash took place. In the stock crash of 2007-2009 the S&P 500 took a big hit, but overall for the period the average has had a 4% annualized rate of growth. The strategy using the 6 month stock market forecasts, however, had an annualized growth rate of 14%, roughly 3 times better.
The chart below shows the buy/sell calls produced by a strategy based on using a weighted average of 6-month market forecasts. I am adding a stock market trading strategy to my monthly blog posts, a Buy-Sell-Hold model for the U.S. stock market based on a weighted average of my forecasts from prior months. Most of the time the strategy yields a clear Buy/Sell opinion, but there are a few spans of time when the model had no real opinion.
The solution I have come up with is to develop a stock market trading strategy based on a statistically weighted average of my 6 month stock market forecasts from prior months, not the current prediction. In late August through September the stock market was panicked by fears of things that don’t have large real dollars and cents impact on the U.S. economy (financial uncertainty in China and Greece along with weak world oil prices).