Given that the Footsie had been tanking lately, and many people have been talking about it, I thought it would be interesting to take a look at its chart over the last five years:
The drop from A to B was 9.0%, making it a correction, nearly.
The drop from C to D was 19.5%, making it an actual bear market (nearly). So if you want to put a positive spin on things, we’re not in a bull market that started in 2009, but one that started in 2016. Doesn’t sound so bad when you put it that way now, does it?
The current drop from E to F has been 7.8%, meaning that it’s not (yet) even a correction. If the market drops another 2.4%, then the market will be below 7000, making it both a correction and below (depending on how picky you want to be with the maths) the peak of the market in 1999. So the Footsie has been in a sideways market for almost 20 years. Katsenelson talks about these kinds of markets in his book “The Little Book of Sideways Markets”. He showed that sideways markets can, indeed, last a long time.
The Dow is down yet again as of writing, by 1.6% to 24,500.
On the 5th Feb I posted on my blog, saying that I thought the Footsie would bounce on the 6th. I was alone in that prediction. As it turned out, everyone else was right, and I was wrong.
I did notice later on, though, that the Dow opened positively, and I figured that was the signal I was looking for. I actually placed a demo spreadbet at IG. It was the first spreadbet of my life, albeit only a fictitious one. I opened a long on the Footsie at 7227 for £1 a point (hey big spender) on 6th Feb after the US market opened.
The markets worked in my favour, and I moved into profit almost immediately. The momentum was lost, though, and I ended the day negatively. On the 7th I was back in profit again. As the day progressed I noticed that the market lost some of its momentum. I decided that the game was up on that one, and that a reversal would take place, so I closed my long at 7270.8 for a gain of £43.
Oh well, at least it was a gain, which I get to spend on virtual beer. It turns out that my feeling that the momentum was lost turned out to be correct, as the market is now at 7170. So I would have made a loss if I had held on.
Looking forward in terms of rewards and risks: if you look at the drop from A to B, that was 9%. It was a severe drop. We’ve already had a 7.8% drop from the recent peak. So, as an estimate, one could take 1.2% as a downside risk. On the upside, I think the Footsie should recover at least half its losses over the next week, for a potential upside gain of 4.2%. That gives a reward:risk ratio of 3.5, which is pretty good.
I guess the thing is to hope that the market tanks again tomorrow, and bet long again for an extra margin of safety. I’ll see how it goes. I’ll report back any decision for action I make.
Stay safe out there.