Tiredness in the stock exchange
The stock exchange is a game of odds. The prices do not reflect the reality but the expectations of the future. This is not easy to internalize, but it is the key to understanding many movements, such as that market ceilings are generated before a recession, just like the soils before their exit. A very good lesson is the one we live in 2015 and 2016. A slowdown mainly from China, increased the odds of global recession. The thing did not stop wringing and hence the rapid recovery.
It is not necessary to be an expert in technical analysis so that it does not help. There are no comments for this product No indicator or draw any line, simply look at a price to know what is cooked in the markets. Today we will use the “Beta” as an indicator.
Despite this, the “Beta” is nothing more than a measure of how volatile an action is in relation to its market. Thus, if an action has a β = 1 it means that the action “moves” in the same way as its reference index. For example, if Inditex (MC: ITX) has a β = 1 (which it does not have), it means that the Ibex35 IBEX 35 rises by 1%, Inditex will also increase by 1%. And the same when it comes down. While an action with a β = 1.5 has a volatility 50% higher than the index, or a β = 0.7 of 30% lower than the index. I repeat, when it goes up and down.
The strategy then seems clear. When we are sure that the indexes are going to rise, we should bet on these shares with higher Beta since they will rise more than the index. Already, of course, but that is that being “safe” in a game of odds is complicated. Of course, the only certainty we have is that when the business cycle bottoms out and accelerates, the odds that the future profits of companies will grow are much greater. Just as when it starts to slow down, the logic is that the benefits of the market in general are beginning to look down. Thus, as small investors, if we do not have much knowledge or access to information, it can serve us, and much, simply by observing what people do that does. For this, we can follow the quotation of the S & P500 High Beta index. It is an index with the 100 shares with highest β of the S & P500, reason why when it goes up the market, it will rise more and vice versa.
Although in 2011 it did not help us, it served to detect the ceilings of 2007 and 2015 marking divergences. When this happens it means that the money at that time is entering the larger companies looking for less risk. And for the moment there is no hint of that.
Sometimes, we become complicated with complex predictive models or technical indicators, when it is easier to simply follow the money. This analysis could extend to the behavior between sectors of the economy, consumption, utilities, financial, energy, technology, health … and we would see surprising things. But I leave it for another post. Just note that within the passive management, you can do active management if we index to different sectors or companies at different times of the cycle. So, we have another tool to look sideways from time to time and the bear does not catch us unprepared.