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Raymond YUEN
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YUEN is a finance professional with over 20 years practical experience in financial accounting, financial management and investment. He is a freelance trainer and grader. He also holds a PhD(Management) with research interest in market crash and Fractal Theory. He served Qualification Program of... More
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  • Imminent Signs Of Bubble Crash

    Imminent Signs of Bubble Crash

    Author: YUEN Wai Pong Raymond

    Abstract

    This paper discusses the imminent signs of bubble crash.

    Introduction

    As a professional investor, it is important to distinguish the imminent signs of bubble crash and avoid the hefty loss. According to Mr. Peter Lynch, the fund manager who grows Fidelity Magellan Fund from US$18 million in 1977 to US$14 billion in 1990 with annual return rate of 29%, he predicted the stock market top by the cocktail party theory. In fact, cocktail party theory is just one of the indicators of the top of the stock market. In the following article, we will discuss some of the signs of the crash of the stock market is coming. There are altogether 13 signs that we will discuss.

    Sign 1

    Cash is rubbish

    When nobody is willing to hold cash, the cash has either been thrown into the stock market, property market or goods. The imminent dry up of liquidity is coming. Once the liquidity dried up, the market may turn into a bear market.

    Sign 2

    Difficulty in Finding Value Stock

    At the top of the stock bubble, it is very difficult to find value stock. Per late Mr. Benjamin Graham's indication, value stocks are stocks with low PE, high dividend yield, high asset backing, low gearing, good management quality, strong balance sheet, strong operating and free cash flow. When you cannot find any stocks like that - be careful.

    Sign 3

    Technical Analysis Sign

    When the chart shows shoulder-head-shoulder, double heads…. Or momentum thrust (75% of the stocks below 360 days moving average line) is weak, coppock indicator is dropping….

    When the chart shows a good number of these signs, the imminent drop is coming.

    Sign 4

    Inflation, Interest Rate, and Money Supply

    If the economy is experiencing inflation, it means that the real economy cannot sustain the money growth. The government may raise the interest rate and control money supply any time to prevent the wage - inflation spiral which is exhibited by the shifting of Phillip's Curve.

    Sign 5

    Opinion of Expert

    At the top of the stock bubble, usually all financial experts are making optimistic prediction of the stock market and stock price.

    Sign 6

    New Stocks

    At the top of the stock market, a lot of new stocks are listed in the market and a lot of people are subscribing for these news stocks. Some of the stocks are just too ridiculously to be listed. For instance, during IT bubble, a new stock was listed with prospectus mentioning that the funds would be used in IT project without concrete plan or projection figures. However, the stock still gathered US$28 million funds.

    Sign 7

    Insider Trading

    At the top of the stock market, we may see more news about insider trading. The insiders are usually some officials of listed companies who seldom trade stocks also try to profiteer from the fervent market.

    Sign 8

    No Effect of Good News

    At the top of the stock market, even if there is very good news such as record earnings, record sales growth, and favorable government policies, the stock price still drops or stays the same. This shows that the market is fatigue.

    Sign 9

    Change in Leading Stocks

    At the top of the stock market, a group of stocks from one industry that was the leading stocks suddenly lost their favor. Another group of stock from other industry takes up the leading effect. Then, it is sign that the market is not far from the top.

    Sign 10

    Cock tail Party Test (Per Mr. Peter Lynch)

    When amateur investors starts to talk about stocks and teach the professional fund managers which stock should be invested in a cock tail party. It is sign of the top of the market.

    Sign 11

    Trading Indicators

    When the weight of volume of call option is high, it is sign of a fervent market and the market may drop any time.

    When a lot of small lot trading, it is a sign that the men-in-the-street are getting into the stock market. According to Mr. Andre Kostolony, this is the end of the bull market.

    When the weight of short selling is low, it is sign of a fervent market and the market may fall any time.

    Sign 12

    Rapid Expansion of Mutual Fund and Hedge Fund

    Some people seldom and dare not invest in stock directly; in a crazy market, they will give their money to the professional investors to invest such as fund manager of mutual fund and hedge fund. When you see record number of new investment funds being set up - be meticulous.

    Sign 13

    This Time is Different

    When you hear comment saying that the red hot market will not collapse because "this time is different", it is a dangerous sign because all the purchasing power has been digested by the market. Remember the 1929 crash, before that, a good investor, Mr. Babson, warned about the crazy market. People laughed at him saying that this time is different. The market collapsed a few months later when the Reuter showed the comment of Mr. Babson. This is the famous "Babson Break".

    Conclusion

    Hope that this short article can raise our awareness of imminent stock crash and help us avoid the catastrophic effect of the crash on our savings and livings. God bless you in your investment venture.

    Jan 16 9:02 AM | Link | Comment!
  • Gauge On Interest Rate Hike

    Gauge on Interest Rate Hike

    Abstract

    Currently, interest rate hike is usually triggered by the rise in inflation. When there is a high inflation, then, interest rate hike will be implemented to cool down the market. However, is this a good indicator for interest rate hike. From the lesson in the Financial Tsunami, we may need to revise the policy on timing of interest rate hike.

    Body of Article

    Currently, interest rate hike is usually implemented when there is a high inflation which is usually measured by the consumer price index. The common belief is that inflation is an indication of economic overheat. However, from the experience of the Financial Tsunami, this method may not be a good way to guard against an economic overheat or damage to the economy due to low interest rate.

    After the IT Bubble, the interest rate was drastically lowered from 6.53% in Jun 2000 to 0.98% in Dec 2003. Though the interest rate rose back to 5.26% in Feb 2007, the damage to the economy due to the asset bubble had already done. This eventually led to the Financial Tsunami in 2008. It seems that the interest rate cut after IT Bubble was too deep and too long and the subsequent interest rate hike back to normal was too slow.

    The cut in interest rate may need to be stopped earlier and rise in interest rate may need to be started earlier. The not-fast-enough action could be because of timing the necessity for interest rate hike be too reliant on inflation and unemployment. Instead of just looking at the inflation and unemployment, some more indicators may need to be added to gauge the economic overheat due to asset bubble.

    Asset bubble due to low interest rate usually happens in two sectors: property market and stock market. Hence, an indicator to gauge the extent of an asset bubble in these two sectors can help us to lower the risk of belated interest rate increase.

    So, a new method of two indicators might be added to the conventional inflation benchmark: Consumer Price Index, to form a new index. It is proposed to call it asset-adjusted CPI.

    Asset-adjusted CPI

    In addition to measure the inflation with the rise in the consumer price level, the 30 year Treasury Bond interest rate times the property market capitalization and the 10 year Treasury Bond interest rate times the stock market capitalization index be added to the calculation of the asset-adjusted CPI. As the size of the property market and stock market is very big, the weights of these two calculations in the asset-adjusted CPI should be reduced by a weight after careful consideration to avoid distortion of the resulting economic overheat measurement. What are the weights being used could be a topic for further research.

    Conclusion

    As a result, even if there is no or low inflation, with the measurement of asset-adjusted CPI, the looming asset bubble problem will also be in the perspective of monitoring of the economic overheat.

    Jan 04 9:51 PM | Link | Comment!
  • Overnight Anomaly

    Overnight Anomaly

    Abstract

    There are a lot of day traders in the market which decide their trading strategy when the market open. However, as we all know, to be successful, we have to be different from the market. The following is a short research into the performance of day trading versus overnight trading strategy.

    Body of Article

    There are nowadays a lot of day traders in the market. The research tried to find whether the day traders are rational and shall deliver similar return when they buy at the opening of the market and sell at the closing of the market versus they buy at previous closing of the market and sell at the opening of the market.

    The following research could be regarded as another anomaly that has to tackle.

    The research was based on Hang Seng Index from 1989/10/11 to 2013/11/22 excluding transaction cost. The following is the tabulated results:

     

    Buy at Opening and Sell at Closing

    Buy at Previous Closing and Sell at Opening

    Cumulative Return for the period

    0.66 %

    738.35%

    CAGR p.a.

    0.018% p.a.

    6.22% p.a.

    Standard Deviation p.a.

    19.7%

    15.0%

    CAGR / SD

    0.00096

    0.414

    Conclusion

    It seems that the market participants might not be very rational.

    Appendix

    Chart of the Returns of Two Strategies

    (click to enlarge)

    Tags: anomaly
    Dec 01 8:18 AM | Link | Comment!
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