It’s been quite a busy week and I have been asked the same question several times, albeit in a slightly different wording each time.
“They say this may be the end of the bear market, is it safe to put my money back into shares over the next six months or will prices keep falling like they have done the last few days?”
Let me say this…..there is only one thing that drives the stock market, it has driven the market forever and will continue to do so…. emotion!
And those emotions come in varying degrees of fear and greed. We only have to look at a chart of the All Ords over the last 4 weeks (or more particularly our big banks) to see the speed and steepness of this latest rally has been driven by greed and panic, only this time it’s a different panic.
This is the kind when you are almost at the bus stop and you can see the bus coming around the corner, so you run like all blazes to try and jump on. You make it aboard but you need to take a few minutes to catch your breath and wait while the adrenalin rush subsides. Could have saved yourself some stamina by waiting calmly for the next one…
This is no different to the investor of late who has waited with baited breath to see if this really could be the recovery and the end of the bear market. They see a stock price rise and their adrenalin starts to rise too….before they know it, prices have moved up so steeply they start to panic and afraid they’ll miss out on profits, they phone their broker and place an order to buy NOW, whatever the cost….just get me in.
Enter the investor who got in much earlier….their analysis tells them the price may run out of puff shortly, so they begin to take profits, sending the stock price south in the process. Just how far south will prices go before turning back up again?
As chartists, we use a variety of tools and technical indicators to help us decide this. Moving averages and momentum indicators are just some of those that allow us to determine the health and strength of a recent trend as well as when a stock has become overbought or oversold.
When we understand how to analyse and read the market, we can rest easy while a stock price moves in a countertrend or goes through a healthy correction to shake out weak hands.
Rather than entering the market in a panic, take your time, educate yourself and learn how to employ defensive strategies such those that incorporate Put Options as protection from the downside.