Saturday, November 10, 2012

TOP DOWN approach to market .....Lies Revealed

You will get all sorts of unsolicited advice on the approach to exploiting markets. Dummy 1-2-3 action steps. How do you think someone sitting in the Tower overseas or locally make decision on asset allocation. I am not referring to those fly by nite syndicate.

The systematic approach to asset/cash allocation is no different from operating a business. Since I have worked and sat on both side of the fence, I can assure you that there are no secrets to allocations. I look at the MACRO first and narrowing down to MICRO. It is the TOP - DOWN approach.

1. Look at the Macro economy or Business sector status. What is the current stage? Initial? Growing? Maturing? Declining? Ending? Common sense will tell you which stage to avoid.


2.Identify the stocks within the business sector. Which are the consistent profitable ones without growth? Profitable growth? Non-profitable ones?

3.Identify the high borrowing levels.

4.Identify the price trend versus the market index. Do they correlate positively? Negatively? Neutral?

Some idiots will give you a list of 20 items must do list! Well, if a few key simple items can't help you, I doubt the more items will help you.

In general, some of the index linked stocks is and should be considered. Additional cyclical 2nd and 3rd lines non-index linked can be added which has positive correlation with market index.

Well if your balls are more solid than mine, you can select stocks that are negatively correlated to the index. I rather flow with the trend and to buck it when selecting stocks. I am not game for buying stocks that in general react opposite to the index.         

No comments: