5 key tips for navigating a lousy stock market
Anyone who invests for a long time will be forced to deal with extremely difficult market cycles. The great market certainty is that there will be bull and bear cycles, but each cycle plays out differently and creates a new menu of challenges and frustrations.
The current market correction is one of the toughest I have faced in my 25 year trading career. Why? Because it was so well hidden by indexes. The trade media hasn’t even used the phrase “bear market” yet, although a slew of individual stocks are already wallowing in just one.
Markets like this are just the nature of the beast, but the good news is that they will eventually create a new crop of opportunity. The most important thing is to protect your precious capital so that when things turn around you will be able to profit again.
Here are five tips for navigating a lousy market.
1. Let go of the urge to predict
When the market pulls back and acts like it has recently, there is a strong urge to make predictions about what will happen next. There will be those anticipating a long and sharp slump and bear market, while others will see a quick reversal and be eager to buy the dips.
All of these people will have compelling and logical arguments to back up their predictions. They may even seem bright, and because we already feel emotional and confused after being beaten by a bad action, we will feel the need to agree with them. We will want to make the “big call” and implement an aggressive strategy.
The truth is that no one knows how things will turn out. We don’t know where the market will be in six months or how it will get there. After the bubble burst in 2000, very few people expected the bear market to last for years. Many people were devastated as they held on tight to stocks in endless downtrends.
In 2008-2009, the bottom came quickly. There was nothing notable in the market move, and the lows have yet to be retested.
At the low point of the pandemic in 2020, many people never trusted the rebound that started in March 2020, but it was a V-shaped recovery, and many ended up running after months of affirmative action.
Just take it one day at a time. Don’t get sucked into the game of predictions. Manage your individual stocks and protect your capital. Watch out for rebounds and don’t be too negative when there is more weakness. Let him play. Eventually the character of the action will change and you can put the capital to work. A new uptrend will last for months and you won’t miss anything if you stay reactive.
2. Operate from a position of strength
When we feel like we don’t have control over a situation, we tend to make bad decisions. The default position when we are uncertain and confused is to do nothing. Inertia sets in and we tell ourselves that it is too late to act.
Your mental attitude towards a market will largely depend on the amount of money you hold and how much control you feel you have over the situation. You’re not as prone to making bad decisions or suffering from inertia when you feel empowered.
In a poor market, you need to have cash, and you need to be able to sell and stay flexible. This is what gives you power. It lets you back out when you think the time is right, and it lets you get out if your timing isn’t right. The bear market can be easily tamed if you operate from a position of power.
3. Don’t focus on trying to predict the absolute bottom
During a bear market, there is usually a strong urge to predict the exact moment when the market has bottomed out and will start rising again. This is the issue everyone is focusing on, and it creates a tendency to act too soon.
You cannot call a bottom afterwards. You can only do this prospectively. What happens is that the last callers are always ahead and then they create another wave of sales when they get tricked.
Very often the people who predict more dips are the same ones who try the hardest to call a dip and buy exactly at the low. They want to be the hero with perfect timing, and they’re trying too hard to do it.
From a strategic point of view, it is often better to be late than ahead of a market downturn. Yes, you will miss some early gains, but if you want strength, there will be natural support levels that will help reduce risk.
It can be an entertaining and challenging game of trying to guess daily market lows, but it’s also the easiest way to put too much money at risk too quickly.
4. If you are going to buy a lousy market, do it very slowly and gradually
The most common way traders experience catastrophic losses is to head into a downtrend that is too big and too fast and then panic, sell, or be surprised by bad news. In a lousy market, strong fundamentals or attractive valuations won’t protect you. Stocks are sold without regard to their individual merits and can sink much further than seems reasonable or logical.
If you can’t resist the bargains that are forming, then go ahead and make a few small purchases, but don’t keep adding to the weakness and don’t let the position get too big, too fast. If the stock isn’t performing, cut it and try again later when market conditions change.
This can help you be much more aggressive when the time comes if you already have positions in place, but only if you still have substantial buying power and are able to be more aggressive.
Move slowly and gradually and wait for strength.
5. Keep watching for new leadership to emerge
Each market cycle will produce a new crop of leadership. These will usually be different names from those conducted in the last cycle. The big gains in a new bull market cycle come from identifying emerging leaders early and trading them aggressively as the cycle develops.
Identifying these stocks requires vigilance and an understanding of the macro environment, but these new leaders will attract institutional investors and have surprisingly strong momentum as a bull market gains momentum. Let the price action lead you to those actions. They will become readily apparent as conditions develop.
A lousy market in which we lose money makes it much harder to put in the effort to deal with it effectively. We are emotionally drained and tend to run away and do nothing. However, it is the down cycles that create the big opportunities, and if we manage them well, the benefits in the up phase will be substantial.
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