Ask Colin

I have just read your latest Trend Trader column (April 2001 pages 16 & 17) and I was concerned about the 2 charts that you produced with regard to the Dow Jones/All Ords compared to the Advance Decline line. Are you suggesting that the bigger companies ie blue chips are still in danger of following the broader market down? What did the market comparison between the above do pre 1995?? Did these two markets always follow the broader market eg 1987?

I have just read your latest Trend Trader column (April 2001 pages 16 & 17) and I was concerned about the two charts that you produced with regard to the Dow Jones/All Ords compared to the Advance Decline line. Are you suggesting that the bigger companies ie blue chips are still in danger of following the broader market down? What did the market comparison between the above do pre 1995?? Did these two markets always follow the broader market eg 1987?

From everything that I have read and observed about market breath indicators, it seems that when there is a market index heading upward and an advance decline line heading downward, sooner or later the index follows the advance decline line down. It is not a precise timing indicator - more like a high fire danger warning. The reasoning behind it is that a healthy bull market will see most companies doing well. However, as the bull market wears on, the going gets tougher economically and eventually only the strongest large companies can continue rising. When they turn down, the bull market is over.

There are differences in all bull markets, but they are far less important than the similarities. As I have been writing in my articles and columns, the hot sector runs out of steam first, then there is a hiatus while the majority of companies begin to top out as conditions tighten up. Finally, the strongest succumb to the recession. The current market is developing on cue. I think things will get worse, before they get better. What is important now is not to focus on whether I am right and the unknowable timing of the process, but on what is the appropriate strategy. As I have been writing, it should be defensive. In the May issue of Shares magazine, I will go into this in more length.

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