Gary's Comments

This is an Active Investor for the archives! It should be stored and referred to when any active investor, no, let's make that any investor, gets euphoric about the markets and investing. Just take a long careful look at the % Change columns in the tables below. They are 1 week changes! Commit them to memory.

We are all living through history in the making!

Markets like this are why you need Risk Management strategies in your portfolio. When the dust settles after this downturn (which it undoubtedly will), all that will matter will be that:

1. You survived the great bear of 2007-2008 (that may still stretch into 2009). That is, you did not suffer drawdown that effectively wiped you out. Wipe out would be a drawdown of more than 80% which means that a portfolio rise of 400% is required to achieve breakeven again. Whilst this might scare some readers we are aware of investors who are in such a position. They have been leveraged in the wrong stocks and did not have exit strategies in place and the accompanying Risk Management rules to de-leverage and reduce exposure to the market.
2. You outperformed the market. At the end of the day investing is a relative activity but we make it an absolute activity. Continuing to outperform what is on offer from the market is any investors objective, especially an active investor's. Suffering drawdown of half to two thirds of the ALL-ORDS is a good achievement. Anything better than half is excellent.

Having Risk Management strategies and executing them when required to do so are the essence of achieving the above two points.

It is important that all investors learn from the mistakes that they have made in this market downturn. It is crucial that Trading Plans are adjusted NOW but not to the extent that such dramatic changes are made that they unduly hinder performance in a rising market. If no lessons are taken from this downturn then the loss of capital will have been for nothing. There are always ways to improve. However, it is important that the improvements are not made based on a sample of one large market downturn. Beware the sample of one. Any improvements made must also continue to work well in a rising bull market.

With this in mind, Share Wealth Systems has spent a few weeks using the paradigm of living through such a market to research how we could improve the performance of SPA3 during severe and mild bear markets alike whilst still achieving outperformance of the market and maintaining the simple daily SPA3 processes. Over the coming two to three weeks we will introduce a new Risk Management strategy to SPA3 and SPA3CFD. We have decided to call it the SPA3 hEdge. As well as SPA3 portfolios have held up relative to the market, we know that this performance can be improved. Based on our research most drawdown can be eliminated during 2002 - 2003 and 2007 - 2008 type bear markets for a small cost during bull markets. Keep an eye out for our announcement.

My comments on the markets are made below.

Overseas Markets Report -

Commodities

The weekly moves shown in the tables above and in the charts below are abnormal price action. Readers may remember my comments some weeks ago about the Oil price action being 'abnormal' when it reached the $147 level. That was euphoric price action in an upward direction. The markets are now experiencing abnormal price action in the opposite direction driven by fear and panic. There will be a retracement in an upward direction and I expect there to be at least a short term upward or at least sideways movement starting in the next couple of days. However, what happens thereafter will need to be assessed day by day.

From a technical perspective it is still too early to say that this is over. The DJIA and S&P500 reached lows on Friday that saw a 90% retracement of the rise from 2003 to November 2007 before they bounced off their lows. The NASDAQ and Russel 2000 experienced 75% retracements. The ALL-ORDS has retraced around 70% of the 2003 - 2007 bull market. It is quite possible that the retracement can go the whole 100% and even more. If we get to the full 100% retracement we'll asses the possibilities from there.

A classic short term bar reversal occurred during Friday's trading on the Dow Jones Industrial Average. It's formal name is an Open/Close Reversal. Given the extreme downward price action that has occurred over the last week and the occurrence of this reversal bar I would expect a short term slowing of trend or at least a pause in trend for a few days. An Open/Close Reversal does not necessarily mean that the trend will reverse.

Note the comments after each chart below and the summary after the last chart.