How to spot the next stock-market rally


Next month I will be speaking at the Financial Advisors Congress on “How to Spot the Next Stock Market Crash”. But, in fact, “crashes” are much easier to forecast than long- term stock-market rallies.

Certainly, there are always hidden lions waiting to pounce on stock prices. If North Korea’s “Kim Jong-nuts” decides to get physical against any surrounding territory, this will obviously trigger a worldwide stock-market disaster. But that is an easy-money bet—just like the eventual Metro Manila earthquake—that you cannot do anything about nor should you try. It will come or not. In the meantime, life goes on until we come to that bridge to cross.

Suppose, though, that tomorrow Kim changes his mind, “finds Jesus”, and issues a statement along the lines of “Nukes? My bad. You guys come over for dinner and we be friends”? In other words, we rarely consider the positive because the way to protect ourselves is to always be looking at the worst-case scenario. I do that for a living.

However, preparing for that worst case is only to protect what you have. How do you forecast the “best-case” scenario where the real money is made?

In perfect hindsight, on January 1, 2009, you should have liquidated all your possession, begged, borrowed or stolen (ok, not stolen) every cent or centavo you could and bought the Philippine or New York stock markets. Since that day, the stock  markets have really not looked back. Certainly, there have been some down moves on the Philippine Stock Exchange. But, overall, both markets have been going in one direction—up.

There are two great mistakes that stock-market investors make. Obviously, the first is holding losing postings too long. Recently, someone talked to me about an issue that they bought at P18. The price is now P6. They wanted some advice about what to do. There is no advice.

However, the other great mistake is watching and waiting as the stock price goes higher.

When the price is going down, the mentality is “I bought at P18 and the price is P16. No big deal.” Then, we go to “I can’t sell at P14 when I should have sold at P16. Maybe it will go back up.” At P8, the “should have sold” price was P10.

But the same thing happens when prices are going higher. “I should have bought at P6 and it’s now P8. Maybe it will correct.” The investor then feels that the best entry point was missed and decides to wait, hoping the stock will go back down one more time to get in.

Note this well. There is no “best price” to buy in or to sell out. Puregold went from P12 to P48 before it peaked. D&L Industries, from P3 to P12. Cebu Pacific, on the other side, went from P130 to P50. All an investor should be concerned about is making money when the price is going up and not losing money when the price is going down.

So how can we spot the next stock-market rally? The same way you could have in 2009. Simplistically—and stock-price movements are simple—when prices stop going down, that is when to buy. But let me give you a preview on stock-market crashes. When prices stop going up, it does not mean the market is turning down.


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