MATI Trader: “As a pensioner this scared the hell out of me”

"I received a mail from one of your advisors Timon Rossolimos advising that there is ABOUT TO BE A 41.9% DROP IN THE STOCK MARKET. As a pensioner this SCARED THE HELL out of me. I can not afford to lose 50% of my investments.

Does this also mean I need to quickly sell my unit trusts & put everything into cash before I lose 50% ?

Is this an advertising con (if so not appreciated ) or is this what FSP are predicting." - Anon
Last week I said the next crash is coming. However, I put more emphasis on the FTSE movement than our JSE All Share Index.

I have no intention to frighten people when it comes to probability predicting. I only intend to prepare them for when, or if, it comes.

Today I'm going to go into more detail about the charts. You're going to discover what happens when the FTSE collapses, how the JSE follows suit and what it will mean for you and your portfolio.

Please read this carefully so you can understand where I'm coming from.

Refer to the chart from last week!

The chart on top shows you the monthly Financial Times Stock Exchange index chart or the FTSE (Footsie). This shows you the 100 biggest companies on the London Stock Exchange.

The chart below is the Johannesburg Stock Exchange All Share Index. This shows the estimated 472 listed companies on one index (JSE-ALSH).

I’m going to zoom into each crash and how it affected the FTSE and the JSE-ALSH.

Crash #1: Dot com bubble and what the JSE did!

First let’s start out with what a bubble is. When investors put so much demand and buy stocks, commodities or other instruments, it drives the price up. It takes up the price beyond any actual reflection of its true value.

Just like soap bubbles, it rises to a certain point until it pops.

And that’s what happened in the year 2000.

In March 2000, the NASDAQ peaked at 5,132. Investors were so confident that the internet and technology was the future, they kept buying more tech stocks.

And guess what followed? The FTSE! Around this time, the FTSE had already made its peak at 6,930. But it was short lived.

In the next three years, the FTSE fell to 3,321, which is a 52% crash.

Sounds frightening? Well let’s now look at what happened in the JSE at the same time.

The JSE-All Share Index (JSE-ALSH) in January peaked at 8,558. In the beginning of 2003, at the bottom of the crash the JSE-ALSH was sitting at around 7,322. This means the JSE only took a knock of 14.4%.

Next, the JSE went to all-time highs in 2004,2005, 2006, 2007 and 2008.

So even though there was a catastrophic collapse on the FTSE and the NASDAQ, the JSE kept on making new highs.

Next let’s look at the second crash

Crash #2: Financial Crisis and how the JSE made new all-time highs

The financial crisis in short, was where the value of financial institutions and assets dropped at a rapid rate. This made people panic and withdraw their money from banks. A huge string of sell-offs kicked in around the world, which caused massive collapses on the stock markets.

Let’s see this in action.

Take a look at 2008 in the above charts of the FTSE and JSE-ALSH. The FTSE peaked at 6,730 (31 October 2007) and crashed down to 3,505 (31 March 2009). This was yet another big collapse for the FTSE, falling 47.9% from its highs previous highs.

And for the last six years, it’s just been floating around the all-time highs. So investing in the FTSE for the last six years was one long drag.

But now let’s compare it to what the JSE-ALSH did.

The JSE-ALSH in May 2008 peaked at 33,309. And in less than a year, it fell to 18,258 which was a 45,18% thunk…. This scared the living hell out of many investors, as they thought it was the end of the world.

But like all recessions, it was short-lived.

Two years later, the JSE-ALSH was at all-time highs at 32,914. And this was typical of the JSE.

And today? Well it’s around 51,806 level…

What does this mean for you and your portfolio?

First of all, what I predicted last week was based on a past probability prediction analysis. It doesn’t mean it’s going to play out exactly because I’m not Nostradamus.

But what you can clearly see is that these BIG corrections happen. No one can stop it because we all base our decisions on demand and supply factors.

But what I can safely say is that, every time we have a recession (correction), over the next few years the JSE-ALSH balances itself again and goes to all-time highs.

The best thing to do for your portfolio is take a look at the assets. Compare how the stocks correlated to the crashes we’ve had, and make decisions to choose safer stocks that continue to make new highs in dire straits.

I don’t mean to go off topic but I’ll give you an example:

The JSE-Gold index has been in a sideways trend for the last 13 years. This isn't a great investment if you put your money in gold stocks.

I’d rather look for the safer alternatives such as, insurance companies, retailers and telecommunications.

Why? People will always need food, clothing, insurance, communication devices and safety.

I trust this brings a new outlook on how recessions play out with the FTSE and the JSE-ALSH. And how you don’t have much to worry about because of how the other crashes played out in the past.

But if I see that things will continue downhill or that we could enter the next Great Depression, I’ll let you know immediately.

So keep reading Trading Tips, and I’ll keep you up to date on the big bad profitable stock market.

And always remember, "Wisdom yields Wealth".

Timon Rossolimos
Author: 94 Top Trading Lessons of All Time