Monday, March 2, 2009

STI drops- The Joseph Cycle

STI dropped by 61.47 points today!
Just remember, a drop of 70% from the peak is around 1164.
So by right there is still room for the index to drop if history is to repeat itself.

Only problem now that I see is..are we going into the cycle of long term recession? Meaning that for the next few years, the economy will not be growing as fast as what has happened over the past decade., and in fact might contract at a slow pace.

I got this idea after reading a book called 'The Joseph Cycle' which I borrowed from the Bedok library. This book was published in 2004. But it did predict the stock market to collapse in 2008. Which is indeed true! ( More info on the book can be found here )

The Joseph Cycle refers to the cyclic nature of the world's economy. Each peak to trough is expected to last 7 years. Hence a complete cycle will be 14years. Going by this, 2001-2008 ( 7 years) is the bull run, and 2008-2014 is suppose to be the bear run. As of now, the author Simon Sim Chin Cheong has been right so far.

He substantiates his point by plotting out the index fluctuation over the years according to 'The Joseph Cycle' and major economic events that accompanied it. It may be coincidental, but it has indeed happened MANY times. However he also says that within this 7 years, there will be peaks and troughs. ( Medium term trading/investing strategy)

If we were to believe him, it would mean that any investment done now, is not to be held for the LONG LONG term of more than 5 years., but for the medium term of around 1-2 years, or rather till when the market rises too fast. This is because the expected returns for the next 7 years might be negative.

I am starting to take note of this cycle theory because I have not experienced a long period of bear market. To me, every time the market drops, I am expecting it to rebound in a few months. This book has opened my mind, and has shown me that it is possible for the market to generate a negative return over a long period of say 7 years, just because you happen to enter to the wrong part of the cycle.

Invest with care! We might really be in the bear part of the Joseph Cycle.

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