RECOMMENDED READING --> | Anatomy of a Crash | Rebound Strategy Vindicated |

ALSO SEE  HOW TO        ----> |Pick the trough(bottom) of a JSE crash |

PERFORMANCE UPDATE    --> | Rebound Strategy Blog |

In our research paper titled "Anatomy of a Crash"  we showed how a market recovery favours those large cap stocks that fell the hardest. We proposed two "Bouncer" or "Rebound" portfolio creation strategies of 5 shares each that should work exceptionally well in a market recovery. However we only published this paper on 12th February, at the peak of a recovery, and we lamented how disappointed we were we never had the knowledge of our research to be able to capitalise on it.

By the 3rd March, the market had suffered another 21% decline from the peak of the "recovery", and we rubbed our hands in glee and added an update note at the bottom of our research paper together with two portfolios we thought would be good punts for the next rebound. By the 5th of March, we threw R50,000 of real money at each of these two portfolios. The rest is history..these two portfolios performed magnificently as shown below, doubling the ALSH performance exactly as in our research piece, with lovely Sharpe's.

 

The daily return of these two portfolios, shown together with the JSE ALSH Index are displayed below. We note that when the ALSI rises sharply, the "Bouncer" portfolios rise even more sharply. However the converse is also true when the ALSI drops (see 2009/04/14 below), so if you are speculating, then take your profits early. But this is also good for long term value investors as these are all TOP-100 shares that are simply hard off their 22 May peaks



GREAT - BUT NOW WHAT?

We have had quite a run since 20 Nov 2008(27% up) and 3 March 2009 (25% up), the last two big troughs. Does this mean you can't apply this strategy anymore? The market seems overbought as at 29/05/09 - does this strategy still apply?

For starters,
Don't make the common mistake and think that because SAPPI dropped 87.2% from the 22 May 2008 peak to the 3 March 2009 trough, and then rose 102% to 29th May 2009 that it is "game over" or "lost opportunity" or "too late to get on-board" - SAP will still be down 74% from its peak! It needs to grow another 289% to completely recover its losses - plenty of room.

Since we have had such a run since the trough, we thought we would devise a modified strategy for those still wishing to deploy it, that would still look for those TOP100 shares whose losses were the greatest from the peak, but AFTER the subsequent rise as opposed to before the subsequent rise. But we add another condition - we only consider shares who displayed a greater than 25% rise in the recovery. Our research shows that shares who do not participate strongly in the beginning of the recovery (or bounce) will offer lethargic returns or even worse, continue a downward slide.

Below is the list of shares we believe are still "good to go" for a rebound strategy. Of course, because we are not in a trough anymore don't expect fireworks like the original "Bouncers" portfolios, but we still believe in the medium term you could do very well with these shares, even if the market cools off a bit. Remember, these are still the top 100 shares on the JSE that have come off the most of their highs, and that's what the rebound strategy attempts to capitalise on.



01/06/09 is the share price on 1st June, P2TROUGH is the 22 May 2008 peak to 3 March 2009 % slide and BOUNCE is the 3 March to 29th May % rise (bounce). DOWN is the net down % from the 22 May 2008 peak to 29th May 2009. So SAPPI, even after a stunning 102% bounce is still 74% down on its peak.

Now the Aluminium sector features heavily here (AQP,LON,AMS, NHM) so our advice is to diversify a little and pick one or two Aluminium issues only. So rather than picking the top 5 shares ranked by DOWN (which means you will land up with 3 Aluminum shares), perhaps pick the first 5 different sector share. Thus an 8-share diversified portfolio would be :

Aluminum : One of AQP or LON or AMS or NHM
Forestry/Paper : One of SAP or MNP
Construction : MUR
Industrial : BAW
Steel : ACL
Coal : EXX
Diversified Resources : One of ARI, or AGL or MVL
Wildcard : UUU


We will incept a model portfolio as at 29 May 2009, dubbed "V-DIV" to track the performance of these shares. We will use AQP, SAP, MUR, BAW, ACL, EXX, ARI and UUU (we used the shares that were down the most to select.)
Please wait a month before we post the returns, after it has had some time to settle in. JSE rules require we alert you to the fact that we will be investing in these shares. This means we will be invested in 3 "Bounce" portfolios (we use the "V" to represent the bounce) called V-T100, V-COMB and V-DIV.

RECOMMENDED READING --> | Anatomy of a Crash | Rebound Strategy Vindicated |

ALSO SEE  HOW TO        ----> |Pick the trough(bottom) of a JSE crash |

PERFORMANCE UPDATE    --> | Rebound Strategy Blog |
 
Make a Free Website with Yola.