3 Ways to Identify the End of a Bull Market

[Dennis Ng]

Welcome to the 59 th Issue of Weekly e-newsletter by www.HousingLoanSG.com


This week I like to share with you “3 Ways to Identify the End of a Bull Market”, an article I wrote which was published in My Paper on 22 July 2008 (Tue) in Mandarin. I’ve translated the article into English for your easy reference.

In the last few months, stock markets have been very volatile. China stock market crashed by 54%, from 6,092 points to about 2,800 points. India stock market crashed by over 35%. The Global Stock Markets are officially in Bear Market territory.

Back in year 2007, I managed to sell off most of my shares at a profit and avoid losing money in the stock market crash that followed.

How did I do it? I used 3 simple ways to identify the end of a Bull Market......let me share with you what are these 3 ways ....

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Dennis Ng, http://www.HousingLoanSG.com – help you get BEST Deal in Housing Loans in Singapore & Australia!
3 Ways to Identify the end of a bull market…
In the last few months, stock markets have been very volatile. China stock market crashed by 54%, from 6,092 points to about 2,800 points. India stock market crashed by over 35%.
The Global Stock Markets are NOW officially in Bear Market territory. From past experience, typically a Bear Market can last 1 year to 3 years. Thus, in my opinion, we have not seen the bottom of the market yet.
Last year I sold off most of my stocks to realize profits. Whatever stocks I am still holding are those that are more “resistant to fall” and “fundamentally strong”.


Some people might comment that:”I’m risk averse, Investing is too risky, thus I rather put my money in the bank to earn interest”. However, these people forget that with Singapore inflation at 7% currently, if you earn 1% from fixed deposits, you’re actually losing 6%.


So, is investing risky? Actually, it is investing without investment knowledge is Risky. Imagine if you don’t know how to drive and don’t have driving licence, would you risk your life to drive a car? Of course, you would say that you would NOT.
However, everyday in Singapore I witness many people who know nothing about investing, risking their money in the stock markets. No wonder so many of them made heavy losses in stocks.


In 1993, when I first started investing, it was a “Super Bull market”. I was making money easily and thought that I was good in investing, when it was actually due to the bull market.
When the market started turning in 1996, I not only gave back all my “Profits”, but ended up losing 40% of my capital.


Having been through the last 2 crises, including 1997’s Asian Crisis and the stock market crash after burst of technology bubble in year 2000, I reviewed and learned from my investment mistakes. This helped me to make lots of gains in the last 4.5 years, and more importantly, also helped me to avoid the agony of the past 8 months of bear market.


How to identify the end of a bull market?
When you buy the shares of a company, you’re buying the “earning power” of the business. Whenever you see P/E ratio, what does it mean? The P/E ratio or price-earning ratio refers to share price divided by earning per share.


If a company has a P/E ratio of 50, it means that if the company earns the same profits, it would take the company 50 years to earn enough earnings to return you your capital.
Thus, is a company having a PE ratio of 50 worth investing? Obviously Not.



However, back in year 2007, both the China and Hong Kong stock markets were trading at a market average PE ratio of over 50 times, which indicated that the markets were already rising like crazy and the bubble would burst, in a matter of time. I took this as a warning and sold off most of my stocks and thus avoided the stock market crash that followed.


Generally speaking, I would only invest in stocks having a P/E of not more than 10 times, I would typically sell a share when its P/E ratio rises to over 20 times. Because a PE ratio of 20 means the company’s Earning Yield is only 5% (1 divided by 20). If a stock only gives me 5% returns, it is not worth risking the possibility of losing money to invest in such a stock.


Currently, Singapore’s stock market average PE is about 13 times, is it worth investing? We need to take note that inflation is currently at 7%, PE of 13 means an earnings yield of 7.7%, barely above inflation.
Thus, I personally do not find the stock market attractive at current levels. With the expected slow down in the economy, coupled with rising inflation leading to higher operating costs for companies, companies might actually report further drop in earnings, thus, current stock prices are not really a bargain.



Price to Net Asset Value (Book Value)
Some business primarily rely on their assets to make money, these include property developers and financial stocks, eg. banks.


For property developer, their main assets are the properties owned and under development. Typically, property stocks tend to trade between price to book value of 0.8 times to 1 to 1 times.
However, last year, many property developers were trading at price to book of more than 1 times, which indicated that their stock prices were over-priced then.


For banks, their main assets are their loan portfolio. Typically, banks trade at a price to book ratio of 1 to 1 or 1.5 times. Similarly, most banks last year were trading at price to book ratio of over 2 times, indicating that their stock prices were too high then.



Note: Price to Net Asset Value is only accurate for analyzing property developers and financial stocks.


Rise of Penny Stocks signal end of bull market


When bull market started going crazy, even “Rubbish stocks” ie. stocks (companies) which are loss-making and without good prospects, were being favoured.
Prices of some of these “rubbish stocks” went up by over 200% in less than 1 month, this obviously signal to me that the end of bull market is very near!


Because I relied on the above 3 ways to identify the end of a bull market, I managed to take profits on most of my stocks before the markets turned. I hope you will also find these 3 ways useful for you as well.
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[Dennis Ng]

After I wrote the above article, I received emails from some people that can I share 3 Ways to Identify the Beginning of a Bull Market?

And below was my reply:

all bull markets begin in bear market.

The beginning of a Bull market is very difficult to identify, becos we only know that markets have bottomed after markets have bottomed.

As I have mentioned many times, the Good Thing is one does NOT need to spot the Top and the Bottom.

According to the Elliot Wave theory, markets move in 5 waves, the part that one can make alot of money "safely" is in Wave 3. Thus, one can totally miss the beginning of a Bull market but still make Most of the Money (safely) by buying near the beginning of Wave 3.

In Wave 5, which is most speculative, this is typically when the "3 ways to identify the end of a Bull market" can be used to identify Wave 5 (PE ratio high, Price to Book ratio high and rubbish stocks rising like crazy).

During the last market cycle, I did not buy at the Bottom and I also did not sell at the Top, but failing to do both, I still made over 200% returns.

I'm looking forward to repeat the same proces again as market move through its cycle once again.

[Dennis Ng]

Observe the nature. Sunrise, sunset. Spring, summer, autumn Winter. High tide, low tide.

In the real world, we have Bull market, bear market. Boom and Bust.

Why go against the Flow?

Making money from investing is very easy and can be done by even the average person by investing according to the Market cycles. By doing so, you can easily be able to Buy Low, Sell High.

There are people who insist on holding on to their stocks even when Bull market turns to Bear. And Profits from investing is just something they saw on paper (last year). Now, with unrealised losses staring at them, they console themselves that these are paper losses, that in time to come, Bull market wil be back and again, and they will turn into Profits again.

On the other hand, those who sold out at profits last year now have the luxury to decide When and How much to re-invest part of their enlarged capital (enlarged becos of Realised Capital Gains/Realised profits).

Those who are holding on to losses now need to wait for markets to turn to break-even. Those who have lots of money to buy stocks when prices are lower now, when markets turn, they are already making 50% to over 100% gains.

That's the difference between one who invest "with nature" and those who invest "against nature".