TRADING THE STOCK MARKET : TO CONTRA OR NOT TO CONTRA

The answer is not "if" but "when" .......

During major share market correction like what has been going on in the past few months, it is unavoidable that some traders may be sustaining major losses.....some paper losses since they could not bear to cut their losses. One question that is often asked if should amateur trader be trading on credit ie using contra (T+4) to trade thereby trading bigger positions than they can afford, thus exposing them to much greater trading risk?

Some people may feel that unexperienced traders should not expose themselves to higher risks by trading on contra. I personally feel that it is not a question of "to contra or not to contra" but it is a question of "when is the right time to use contra to trade".

To me the right time to use contra or even margin for the stock market is only during BULL market, assuming one is a LONG trader (ie you only BUY but do not SHORT).

I feel that as long as it's a bull market, we can still trade using contra because there are a lot of hot money in the market and we often see stocks rally, rest for few days and hit new high again. So one can exit easily since stock will usually rebound higher and very quickly. But during downtrending market like now.......not advisible for some people to use contra to trade unless you are very disciplined about cutting losses when the price move against you.

Then the next question is how to identify a BULL market......there are no hard and fast rules but I believe the following are some of the characteristics of a BULL market :

1. Start from the macro level - looking at various stock market indices eg US dow jones, hong kong hang seng index and singapore straits times index

Ideally, they should be at a recent high ie 3month 6month or even 12month high. i personally like 6 month high. If the rest of the indices are not there yet, at least home country index must be at those level

2. Then we zoom in on straits times index technical indicators

a. multiple moving averages (MMA) - short term MMA should be above long term MMA or

b. daily index above 50 days exponential moving average (EMA) and 50 EMA above 200 EMA

3. Trading volume for the whole market and a group of hot stocks - should be at a recent high ie 3m or 6m or 12m high

One last and quite effective indicator - Retail sentiment

a. when your remisier is telling you that he has no time to take your calls and his monthly income has quadrupled
b. when you hear that taxi drivers or your aunties are giving stock tips to friends and making money from stock market

when you see the above, chances are we may be in the last phase of the BULL market ie the end is near......how soon is subjective, it can range from 6 to 12 months from the time you get tips from your next door neighbour.

I remember early 2007 when i was in hong kong, while travelling on a bus, i overheard the bus driver telling a passenger friend that he made HK30,000 within one week.......then my yellow light warning pops up!

cheers

rooney