Should investors hunt for the bottom in a stock market?

Team Veye | 27 Apr 2020

Should investors hunt for the bottom in a stock market?

It is of no surprise to know that subsequent to every market crash, the most frequently asked question has remained the same, whether a bottom has been made?

While market pundits have often been telling the investors that it is impossible to time the market, it could be only partially true.

As everyone wants to buy low and sell high, it becomes a daunting task, particularly during and in the aftermath of such a pandemic. Investors also devise different strategies of either buying in tranches or forego a margin of 5-10% above the bottom.

While there is no sure way to know when the market or a particular stock has bottomed, keeping certain indications in mind usually help. Some data comes handy to know what is the bottom and when it is formed along with the base.

Probability and back testing can give a reasonable idea on when does the recovery start and how fast and accurately the confirmation could be arrived at.

Follow through days offer certain data, but that does not mean that time has come to jump into the market. Though about bottom one can only say retrospectively that it has been formed, the base formation can be more apparent. It is formed after a strong fall. The market or the stock trades near but does not close below the lowest closing. It may continue like this for some weeks or maybe a few months.

The second indicator to base formation comes when it starts trading 5% above the lowest closing and out of 9 consecutive closings, not more than 3 are negative closing and the remaining 6 are positive closings. And no day it closes 10% below in remaining days.

It will be pertinent to note that many times false signals are generated. Because the market is in no hurry to form either base or bottom.

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