Will We Know When We've Made a Low? 30 comments
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At some point, this stock market is going to overshoot to the downside, just as it overshot to the upside, and there will be tremendous money to be made. Of course, everyone wants to catch the bottom, so that creates violent rallies when it seems as though we've made a low and equally violent reversals when those hopes are dashed.
A look at some recent large market declines -- 1970, 1974, 1987, and 2002/2003 (charts above) -- suggests that market bottoms following major drops tend to be complex affairs. Sometimes, as in 1970 and 1987, you get a washout selloff that marks intraday lows for the bear move, followed by retests that hold above that intraday low. Other times, as in 1974 and 2002/2003, you get the classic pattern of a momentum low (the point at which the number of stocks making fresh annual new lows hits a peak) followed by subsequent price lows on lower momentum (and fewer new lows).
Note how, in the charts above, there tend to be substantial rallies and sizable selloffs even after price lows have been made. This volatile choppiness makes it difficult for traders and investors to hold positions with conviction.
It is this tendency toward complex bottoms that means that investors can find good points for entry even after ultimate lows have been made. Indeed, traders who were too eager to catch market bottoms in early May, 1970; September, 1974; early October, 1987; and July, 2002 found themselves facing significant further declines. We really only know when we've made a low when we're able to assess subsequent buying interest after price and momentum lows have been made. That often means missing exact price lows, but it also avoids the discomfort of catching those proverbial falling knives.
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This article has 30 comments:
Personally I am not trying to 'catch the bottom'. I wish to catch the gains during the next bull market and avoid the losses of the current bear market. There is a significant difference.
Patience pays.
Low online commissions are cheap profit insurance. All my trades this year cost me half of what I lost the last day I held AAPL, but I sold it at 180 so I'm not complaining.
God forbid you miss the "real low." What about all the 1,000 percent gainers like Apple and RIM that came after the low? Or MCF that came years after "the low?" Or POT and ISRG? Trying to catch the low is a loser's game. The biggest winners show up in bull markets and this market has no leadership right now. Preserving cash and waiting for a better environment with leading stocks is a winning strategy.
Why should I care what happens to stocks a month or three after I buy them? I'm not going to sell. In ten years there is a slight chance. The only point of timing is to get more shares for the buck. Let clueless leverage speculators worry about every buck and squiggle; if you are investing your own money, just buy after all large pullbacks and never sell until you've at least doubled your money. The whole point of using your own money is you can hold as long as that takes, and longer if you want.
Just a little '70's-style support for ya!
What is the guarantee you will be around when all your stocks pay off after a lifetime of buy and hold? Why not try to find a way to have them pay off earlier and better?
As for calling a bottom and when to buy, again, buy incrementally. To be in cash right now would have been good...but at these valuations, *some* increment should be going into the market right now! Save some for the next decline. If we start having lower lows and higher highs...then you can feel better about putting more increments on. But you never go all in. Leave 20% even if you think it's all up from here.
If anyone has or could now... we would already know their names!
while some may have the audacity to call it from their apartment in Boston, do they have skin in the game?
*The better opportunity is that apple is $90/share or (insert your company here) and what we have is companies with a solid footing and future and a +30% discount.
find our gems, buy and hold... if you have the luxury as I do..
I have 30 years left to watch these babies bloom!
for those with that kind of time... this is a bargain
but if you look at your charts if you were to invest exactly 2 months after the initial extremly large move down - you would always catch the wave up
Brought to you by the government backed fractional reserve banking cartel.
You may call yourself The World's Worst Stock Picker, but you sound smarter than many here. Your entry point and stop strategy sound well thought and I believe will prove to be right on the money.
I'm not sure what you mean by 'bought a covered call'. Do you mean you _wrote_ a covered call on Ford? If you received the premium, that means you sold the Call, not bought it. And who is the other 'win' in the 'win win' you mention?
I have a newfound respect for the stock market as an alternative type of gambling !
If you are going to buy now, best to have some predetermined point at which you accept that the bottom isn't in should that be the case. World's Worst has the right idea. Low risk. Conserve capital.
As for skin in the game, here's my actual history with actual money:
I sold everything between August and November 2007. I bought QID (inverse of QQQQ) in November of 2007 and swapped between that and cash until just before Fannie and Freddie were nationalized. I made good profits and left a lot more on the table for fear that government interference would make equity markets too unstable to trade (as has proven to be the case).
I have also been in and out of GLD options with good profits as well. In the last week I have captured enough profit to pay my necessary expenses for many months (oddly enough by hedging my long GLD position during the drop).
For 2008 I have more than doubled my initial brokerage account balance and I still hold a long position on GLD options which might make even more. Most of that time I sat in cash, only taking positions when I felt the odds were very much in my favor. I was fortunate to do so well, but I never felt that I was risking a big loss in the effort. I don't think I was ever down by more than 10% from the balance at the beginning of the year.
Please don't ask me "how I did it" because there are many factors I consider. I've been doing this for many years, seen a lot of things, and made a whole lot of mistakes on the way.
Based on my experience I'm not willing to say the bottom is in yet. The current trend is down. Until I see that change, I expect more of the same. As long as Paulson's boyz are changing the rules regularly I don't expect the market to get it's feet under it for a sustainable rally.
Maybe I'm wrong. If so, then I'll be looking to buy when the trend turns up. Since I avoided big losses on the way down, I can afford to wait on the way up.
Better to avoid a loss and capture a surer gain than to gamble that you got in at the lowest price and risk losing because you misjudged.
Basically the lesson I've learned is to be very careful risking your money unless you are nearly certain that you will do well. I don't see that in today's market, so I trade in spots where I believe I can make some good gains and then get out to wait for the next spot.
It works for me, but it may not be a suitable style for others.
Based on standard valuation metrics, Nortel wasn't worth $1200 in 2000, $25 in 2005, or even $1.60 now.
99.99 % will lose money trying to buy the bottom, 01% will get it right.
..but there are fools born every new low. ;)
doesn't that simply mean "someone will find the low. Just not you."?