Should investors hunt for the bottom in a stock market?
Team Veye | 27 Apr 2020
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.
Veye Pty Ltd (ABN 58 623 120 865) authorised representative (AR No. 001261006) of Vested Equities Pty Ltd which holds an Australian Financial Services License (AFSL) No. 478987. Veye to share only generic financial views through its website, reports and newsletters without taking into consideration your personal financial needs or investment objectives. Although Veye takes the utmost care to ensure the accuracy of the content and that the information is gathered and processed from reliable resources, it is recommended you seek professional advice from your financial advisor or stockbroker before acting on any of our recommendations. Veye Pty Ltd advises it’s users to pursue investing as a long-term goal. Stocks are subject to real time changes therefore all the information we share represents our views at the date of publishing and we request our readers not to interpret our reports as direct recommendations. Past performance is no indication of potential future performance. The securities and financial products we study and share information on in Veye Reports may have a product disclosure statement or other offer document associated with them. You should obtain a copy of these documents before making any decision about acquiring the security or product. You can refer to our Terms & Conditions and Financial Services Guide for more information. Veye Pty Ltd confirms that the employees and/or associates of Veye Pty Ltd do not hold positions in any of the financial products covered on the website on the date of publishing this report (as mentioned on the website www.veye.com.au).