Has the Australian Stock Market…

… ever seen anything quite like this?

I updated my “Stock Market Seismometer” (click on the separate tab above for details) for the first time in many months. I have to say, the results shocked me. Over the course of 2011 the Australian stock market slid down even further into “oversold” territory. As we head into 2012 things have never looked so bleak. Or maybe 2012 will be the year of the rebound? I expect at some point growth will move back to its long term trend, but when that will start to happen is anyone’s guess.

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Big Blog Theory nomination

It was very nice to receive an email a couple of days ago, letting me know that The Bernoulli Trial has been nominated for The Big Blog Theory science blogging competition.  The Big Blog Theory “was created to celebrate National Science Week 2010 and to acknowledge the Australian bloggers out there who contribute to the communication and understanding of science online.”  Finalists will be announced on Friday, 9 July.

So thank you to whoever nominated me.

I’ve updated my Stock Market Seismometer (see separate page tab above) to bring the data up to the end of the Australian 2009-10 financial year.  Not good news for share market punters.  Half of the recovery recorded throughout most of a hopeful 2009 calendar year has been wiped out.  How much further it has to fall, or whether it can turn things around, I just don’t know.  I don’t think anyone does.

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Is this the beginning of the double-dip?

I’ve just updated my Stock Market Seismometer (see separate tab above) for the month of January 2010, and a disturbing new trend is starting to emerge.  Having spent most of 2009 digging itself out of a massive hole, the market is now showing every sign of turning around and heading south again.  What I thought might be a sustained “V” shaped recovery could actually be the middle of the “W” shaped collapse that many commentators feared.

Or is it still too early to tell?   Of course, if I’d been following my own advice, (I’m not qualified to give YOU advice) I’d have taken my money out of the market months ago…

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NOT to be used for FINANCIAL ADVICE. For academic interest only.

The “V-shaped recovery” continues

…or is it more like a bullet ricocheting off the floor, about to hit us in the cojones?

Sixteen days late, but tonight I finally got around to updating my “Stock Market Seismometer” (see separate tab above) for the period ending July 2009.  It was a relief to see the control chart has moved out of “extremely over-sold” territory and into the “highly over-sold” range.  I had to go to all the trouble of changing the font colour from red to orange!  The index is now back to where it was in October last year, and continues its inexorable march upwards.

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NOT FINANCIAL ADVICE.  For academic interest only.

Is the worst of the GFC really behind us?

The decision by 10 US banks this week to repay their TARP money and escape the clutches of the Obama remuneration busybodies more or less confirms that the financial crisis is over.

Alan Kohler, “Pricing out the crisis”, Business Spectator, 11 June 2009

Alan Kohler is an Australian business journalist that I have a lot of time and respect for.  So it was interesting to read him confirm what my own crude Stock Market Seismometer has also been indicating over the last three months… perhaps, financially speaking, things are returning to a state of normality?  I’m not qualified to give financial advice, but I’m quietly optimistic that the worst of the Global Financial Crisis is behind us.

Now there’s only the swine flu pandemic currently sweeping Australia to worry about!

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That Really Is A Lovely Bottom

I’ve updated my Stock Market Seismometer (see separate page tab above for details) for the month ending April 2009.  I don’t work in the finance industry, and I’m not qualified to provide financial advice, but it seems that perhaps (just perhaps) the stock market has hit the bottom.  I’ll very likely live to rue that prediction.  The pundits say it’s a dead cat bounce with a lot worse to come.  But over the last couple of months the Australian Stock Exchange All Ordinaries Index has, at least according to my crude measure, started to reverse out of the massively over-sold territory.  There’s a long way to go before I’d describe the stock market as being anything like “in control”, but at least we’re now heading in the right direction.

stock-market-seismometer-2009-04

What an amazing roller-coaster ride.  I’m feeling a little bit woozy from it all.

As an aside – I can’t give you financial advice, but I can at least take my own.  I’ve decided that now is as good a time as any to put a bit of my own money into a managed fund.  So I guess we’ll see what happens.

The Stock Market: Beautiful One Day, Perfect The Next (Part 2)

Several weeks ago I used simple conditional probability to formulate an optimal investment strategy:

…put your money into the market only if the last month was up.  If the prior month was down then keep/take your money out.  Lather.  Rinse.  Repeat.  In theory this strategy should work about 65% of the time.  If, on the other hand, you put your money into the market when the previous month was down (or sideways) you’ll have just 49% chance of making a profit.
The Stock Market: Beautiful One Day, Perfect The Next

The purpose of the analysis was not, and is not, for anyone to use as financial advice (which I am not qualified to give).  It was for academic interest only.  And this remains the case.  However, I wanted to measure how the theory would “work” in the “real world”.

I decided to test my theory over a timeframe covering the last five years.  This has been an interesting period on the Australian Stock Exchange (ASX) to say the least.  Several years of a huge bull run completely wiped out in 12 months by the Global Financial Crisis.  I wondered how my investment strategy would hold out against that kind of shenanigans.  Using monthly average ASX All Ordinaries adjusted close indexes (AORD) I invested a theoretical $10,000 in the market at the beginning of January 2004.  Strategy 1 is my optimal strategy: put money into the market only if the previous month was up.  If the previous month was sideways or down then pull your capital out.  Strategy 2 is the control: capital remains in the market.  For example, the first six months of capital growth using Strategy 1 and Strategy 2 would look like this:

ASX AORD
(adj close)
Monthly Δ Strategy 1
(optimal)
Strategy 2
(control)
Start $10,000 $10,000
Jan 2004 3283.6 -0.7% $9,932 $9,932
Feb 2004 3372.5 2.7% $9,932 $10,201
Mar 2004 3416.4 1.3% $10,062 $10,334
Apr 2004 3407.7 -0.3% $10,036 $10,308
May 2004 3456.9 1.4% $10,036 $10,456
June 2004 3530.3 2.1% $10,249 $10,678

Between January 2004 and October 2008 there were 58 months in total.  For 39 of those months the ASX All Ords went up, and the average percentage movement of these “up” months was +2.6%.  In the remaining 19 months the index went sideways or down, and the average percentage movement of these “flat/down” months was -4.1%.  This has obviously been skewed by the market meltdown over the last year or so and the last two months in particular.  We’ve seen some horror months on our Stock Market lately.  For example the AORD fell fell a massive 11.3% in January 2008 (looking back this was the death of the coal mine canary), 11.2% in September 2008 and then fell 14.0% in October 2008.

But what if you had used my investment strategy over the last five years?

Well the bad news is that Strategy 1 quite significantly underperformed Strategy 2 during the bull run.  A few relatively minor flat/down months here and there meant that capital was pulled out and very healthy returns would be missed during the subsequent month.  But the good news is that Strategy 1 protected the investor against the financial meltdown.  By October 2008 the initial $10,000 invested using Strategy 1 in January 2004 was worth $14,508 (average growth of 8.0% p.a. compounded) vs. $12,047 (3.9%) for Strategy 2.  So the really good news is that Strategy 1 outperformed the market by more than double.

Woo hoo!

Enough hubris.  Of course things are a lot more complicated in the real “real world”.  For a start, history is no guarantee of future performance.  Strategy 1 might look good on the spreadsheet but carries more risk.  Also, the success of Strategy 1 over Strategy 2 assumed no brokerage fees.  And it took no account at all of dividend payments or relative tax consequences.  Under the weight of these considerations Strategy 1 doesn’t look quite so “optimal” after all.

But an interesting result nonetheless.

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NOT FINANCIAL ADVICE.  FOR ACADEMIC INTEREST ONLY.