First of all I’d like to wish everyone a Happy New Year… May you have a fortunate year coming u ahead.

Judging from volumes, it seems that many investors are unloading or rotating into defensive sectors for the New Year. The question is will the bulls be raring to go again after the CNY? There does not seem to be a clear view from the street as yet, but many blue chip counters have been demonstrating classic symptoms of technical breakdown - which is characterised mainly by a fall below a moving average and the majority of bears out there being technical analysts as a result. These traders will be out of the market and waiting for consolidation.

Value investors however, should pay attention. Because with the technical traders out of the market, any bullish action after CNY will have to be generated by you. The question therefore is, do the value investors consider things cheap enough yet? If you’re not familiar with this type of analysis, it’s called the Prisoner’s Dilemma and breaks down as follows:

Assume that there are two prisoners in a room. Both are given the option of either laying the blame on the other or staying silent. If both lay the blame on each other, then both get 2 years. If both stay silent, then both get 6 months. If one blames the other and the other stays silent, then the prisoner who blames the other will go free and the prisoner who stays silent will get 5 years. From the perspective of each prisoner, the theory states that it is always preferable to betray the other. This is because if he stays silent, then he runs the risk of being put away for 5 years. If he betrays, then the maximum penalty he will get is 2 years, with the potential upside that he will walk away a free man.

Of course investing in the stock market is not as simple, but the thought processes are fairly similar in that each investor will balance his options in the light of what other people are doing, and pick the course of action which best upside and the least downside. Whether you are out of the market, partially in, or fully invested, the secret lies in being able to determine which prisoner you are right now…