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What Moves Stock Markets? And How It Should Impact Your Investment Strategies?

You should not be moved by how the markets move


After investors have put their hard earned money into the stock market, their next concern will be how well their investments do. When the stock market is doing well, we look at the prices, smile and go back to our daily lives. When the stock market is not doing so well, we look at the prices, panic and let it ruin our entire day.

It does not matter if an investor goes in thinking of a long-term strategy or to just hold for a period of time – they will go back to look at the prices of their investments very often. This is because humans are emotional beings.

When we look at prices, we think we are monitoring our investments. But this tells us only part of the bigger story. What we should be doing is to look at the price chart of stocks to truly monitor how our investments are doing.

Read Also: A Simple Technical Analysis Concept That Will Help Even Long Term Investors

Even The Biggest And Best Stocks Fluctuate

When we look at any price chart, we will observe that they always have a zig-zag pattern. It really does not matter if they are going upward or downward, they will do so in a zig-zag pattern. Below are three examples of very stable and strong stocks. You will see that they too always fluctuate up and down.

Singtel

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The Straits Times Index

S&P 500 Index

3

Source: ShareInvestor

In the above examples, we take a look at the price charts of Singtel, Singapore’s national carrier, the Straits Times Index (STI), a list of Singapore’s best 30 stocks and finally the Standard and Poor 500 (S&P 500) Index, a diverse list of the top 500 largest companies listed on two of the world’s biggest exchanges, the New York Stock Exchange (NYSE) and NASDAQ.

What is apparent in all three is that over the last 20 years, they have all zig-zagged up, down or in a flat manner. This tells you that even the biggest, best and most diversified portfolios will experience such movements.

Why Do They Fluctuate?

Stocks are always moving up or down because of buying and selling patterns. And these buying and selling patterns can be broken down into three broad categories.

1. Fundamentals

Fundamentals are determined by how individual stocks have performed over a period of time. Regulations require companies to disclose their performance every half-yearly or quarterly. Through these announcements, investors are able to peek into how a stock is performing, measure it against past performances and determine if it has done well or badly.

During these evaluations, some indicators that investors usually use are revenue and profits levels, the company’s ability to manage the inflows and outflows of cash and its overall business management. Every now and then, companies also release announcements informing the public of its business updates, whether it has won a significant new contract, was involved in a corporate exercise or face a legal issue.

Investors will usually see more volatility and sharp movements occurring when companies announce exceptionally good or bad results, or have a good or bad announcement hit the market. One example was when ARA Asset management halted their trading midday on 3 November 2016, announcing plans to delist the company with shares to be bought back at a premium.

ARA Asset Management (3-month chart)

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ARA Asset Management (10-year chart)

ara-asset-management

Source: ShareInvestor

The red circle indicates the day it was reopened for trade in the market after a halt was called on November 3. There was a spike up. Note that nothing happened to its underlying business, it still ran the same business it was running a few days ago. We also put a blue circle there to indicate that maybe there was some insider knowledge of the deal being leaked beforehand, and this resulted in an upward spike in prices before the announcement was made.These types of information form the basis of whether an investor thinks he or she should buy the stock or sell the stock.

However, investors can see that over the past 10 years, the stock has experienced many such sharp spikes and dips in prices. And has even gone above the current price levels.

2. Technicals

Techinicals are another indicator that impacts buying and selling. These are formed by external factors that may impact a stock’s price, regardless of how well or badly is it doing.

Some examples of technicals include industry news and government policies surrounding the potential of a stock to outperform or underperform estimates. Another determinant is the strength of a stocks competitors – the logic behind this is that if its competitors which are operating in the same industry are doing well then the stock should do well too.

One example of government policies and news affecting stocks could be seen when the government decided to auction off a fourth telecommunications license in Singapore. The potential arrival of another competitor in the industry sent the stock prices of the three existing telecommunications companies significantly downwards.

M1 (3-month price chart)

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M1 (10-year price chart)

m1

Source: ShareInvestor

The red circle in the 3-month chart above shows the day three other telecommunications companies submitted bids to become the fourth telco in Singapore. This has occurred even though a license has yet to be issued and past auctions have failed to go through. And in the case the auction goes through it will not be implemented until 2018. Nothing has happened to the business but people think a fourth license will be issued this time and it will significantly impact M1’s business.

Again, as you can see in the 10-year chart, the share price of M1 has dipped below this levels in the past.

Trading patterns can also affect stock prices. These have absolutely nothing to do with the stock other than how its prices have been moving in the past. Traders use these patterns to buy and sell stocks, thus impacting its prices.

3. Market Sentiments

Thirdly, overall market sentiments also affect buying and selling patterns with investors’ confidence diminished or boosted.

In the lead up to the announcement of Donald Trump’s victory in the recent presidential elections in the USA, the futures market of the S&P 500 index, which was closed at the time, sank 5%. When the news was gradually digested by the people and by investors, the index reversed all its losses and even posted a gain the next day.

STI (1-month Chart)

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STI (10-year Chart)

sti

Source: ShareInvestor

We’re using the STI to show what happened. This is because the markets in the USA were closed at the time. On 8 November 2016, when Donald Trump was leading the race to become the next president of the USA, the futures market in the USA plummeted. This caused ripples globally, and the STI sank as well. This was caused by poor market sentiments that investor feared Donald Trump’s policies would usher in. Then, when the markets in the USA shrugged off this notion and posted gains the next day, the STI replicated this and posted a gain, even higher than the previous day.

Once again, when compared to the 10 year chart, these spike and dips hardly cause a dent in the overall picture.

Other factors that affect market sentiments include natural disasters, terrorist attacks and unrelated government policies.

Unlike technicals, these announcements or news do not have any relation to the business or its operations.

How Does This Impact My Strategy

At this stage, we quote Warren Buffet: “Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.

Having a long-term strategy in place is vital for investors. They should not be overly concerned by short term market fluctuations and tempted to make adjustments to their portfolios every time there is some new information in the market.

A yearly or bi-yearly review of their portfolios can be made. At this juncture, investors can go through their trades and investment decisions. Look for areas of improvements after comparing it to certain benchmarks they have set, for example, the STI or other measures such as CPF interest rates. After this, they should look for areas where they can make adjustments to their portfolios.

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