How To Handle Bull Markets And Bear Markets By Tracking Changing Stock Market Trends

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Some people dismiss stock market timing as impossible. But understanding how bull markets, bear markets and all conditions in between affect your portfolio — and how to handle them — is crucial to your long-term success.


During a bull market or strong uptrend, you can generate significant profits. But if you just blindly follow a “buy and hold” approach through a bear market (or extended downtrend) and don’t use any rules for when to sell stocks, it’s very likely all those gains will completely or significantly disappear — or even turn into a loss.

“You absolutely must have a proven, reliable method to accurately determine whether you’re in a bull or bear market. This is the most important lesson you can learn if you want to stop losing and start winning.”
William J. O’Neil, IBD Founder

The CAN SLIM Investing System helps you navigate both the ups and downs in the stock market and leading growth stocks. Although the “M” — Market Direction — is the last letter in CAN SLIM, in many ways it’s the most important.

But first let’s understand what it means to “time the stock market” and establish realistic goals and guidelines.

Is It Possible To Time The Stock Market?

The short answer is yes. But it depends on how you define stock market timing.

The goal of practical market timing is not to get in at the very bottom and out at the very top. That’s simply not doable for either advanced or beginning investors. Not only is such a goal unrealistic; it can be costly and dangerous. As the Wall Street saying goes, bulls make money, bears make money, but pigs get slaughtered.

Stock market timing is doable if you define it as making money in the early stages of a new uptrend, and safeguarding your gains as the stock market indexes and individual stocks begin to weaken and slip into a correction.

That, of course, begs the question: How can you determine the current stock market trend and identify when it begins to change?

In this section on how to invest in stocks, you’ll learn how to answer those questions using rules based on over 100 years of market history, giving you a time-tested and realistic approach to stock market timing.

Why Stock Market Timing Matters

History shows three out of four stocks move in the same direction as the major stock market indexes, either up or down.

If you buy stocks during a market uptrend, you greatly improve your chances of being right. But if you buy as the market indexes are in a downtrend, the odds turn against your, increasing your risk and the likelihood of being wrong.

No stock is immune — whether it’s a highflying growth stock, a large cap or a value stock. The major stock market indexes (Nasdaq composite, S&P 500 and Dow Jones Industrial Average) exert a tremendous pull on individual stocks.

In a powerful bull market, leading growth stocks of the time can make enormous price moves. Think game-changers of their day like Apple (AAPL), Tesla (TSLA) and the FANG stocks — Meta Platforms (META) (formerly called Facebook), (AMZN), Netflix (NFLX) and Google parent Alphabet (GOOGL).

But when a bear market or intermediate market correction hits, most stocks head lower. That’s particularly true for those that led in the prior cycle.

If you just blindly hold your stocks and take no defensive action as a bull market turns into a bear market, you risk giving back all of your hard-earned gains (and then some).

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On the flip side, when a new uptrend begins and gathers steam, the best stocks to buy and watch will begin to take off. This gradual shift in trend often starts when fear and excessive pessimism still dominate the headlines.

Understanding what to look for and how to handle both market tops and market bottoms is the key to effective and doable stock market timing.

Understanding Stock Market Trends

Fortunately, there is a time-tested way to step off that roller coaster and make sense of — and profit from — changing stock market trends.

In this section, you’ll learn how to use tools like The Big Picture and Market Pulse to track and adjust your exposure to fluid stock market trends and conditions. It’s not about making predictions on what the indexes and leading stocks will do in the future. It’s about using stock charts, moving averages and other tools to see how they are behaving right now.

In other works, tracking what the indexes and market leaders are doing — not guessing what you think they might do later — is the key to successful stock investing.

Once you understand that and know what to look for, you’ll be well on your way to achieving the fundamental goal of investing in stocks: Make money when the market is trending up, and protect your profits when it starts to trend down.

But first, a little background on the stock market indexes.

What Is The Stock Market?

The stock market is a broad term that essentially refers to a collection of different stock exchanges where shares of companies are publicly traded.

There are many different exchanges in the U.S. alone, with the Nasdaq and New York Stock Exchange (NYSE) being the most important and best-known.

Generally speaking, the NYSE, which traces its roots back to 1792, tends to have larger, more established firms. The Nasdaq, which started in 1971 as an acronym for the National Association of Securities Dealers Automated Quotations, tends to have younger, faster-growing companies, including many tech stocks.

When you hear or read that “the stock market was up (or down) today,” that typically refers to the major market indexes — certain groupings of publicly traded companies in the major exchanges. Tracking these indexes helps you spot and make sense of general stock market trends.

What Are The Major Stock Market Indexes?

The three primary stock market indexes are the Dow Jones Industrial Average, S&P 500 and Nasdaq composite. There are many other indexes as well, including the NYSE composite, S&P Midcap 400, S&P Small Cap 600 and the Russell 2000.

You’ll often see financial shows and publications mention the latest action of the Dow. While an important index, it’s actually not as significant a bellwether as the S&P 500 and Nasdaq in terms of gauging overall stock market trends.

The Dow tracks only 30 companies, a tiny sample of the thousands of stocks traded every day. Plus, the companies are already well-established large caps. These are generally slower-growing, less dynamic enterprises.

The Dow Jones Industrial Average is home to industry giants like Chevron (CVX), Boeing (BA), Home Depot (HD), Walmart (WMT), Nike (NKE), Coca-Cola (KO) and JPMorgan Chase (JPM). But the Dow also includes some bellwether tech stocks like Apple (AAPL) and Microsoft (MSFT).

At IBD we focus primarily on leading growth stocks, tracking the price and volume action in the major indexes. The Dow is important and closely watched. But the Nasdaq and S&P 500 provide much broader insight into current stock market trends. They give fuller insight into whether it’s time to buy stocks aggressively or incrementally sell stocks to manage your risk.

See What’s Happening In The Stock Market Today

Stock Market Timing: Tracking Changing Trends

As all investors know, the stock market constantly fluctuates — up one day, down the next. How can you keep daily changes in perspective and decide if it’s time to buy, sell or hold? The key to stock market timing that works is to focus on the longer-term, underlying trend. To do that, you need to answer three questions:

  1. Is the market currently in an uptrend or downtrend?
  2. What level of market exposure sure I have in the current environment?
  3. How can you tell when the trend starts to change for better or worse?
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IBD gives you a broad look at whether the market is in a strong uptrend, an uptrend coming under pressure or a clear market correction.

As shown below, IBD also provides five general ranges of market exposure to help you gauge when to be more aggressive or more defensive.

Market Timing Using 5 Tiers Of Market Exposure

The Market Pulse inside The Big Picture helps you manage risk in the stock market by providing a tiered approach to market timing. You’ll find these features on the Market Trend page.

Stock market trends typically do not change overnight. Certain signals build over time, eventually causing the indexes to shift from a bear market into a bull market, or vice versa. The Big Picture tracks such signals each day in the Nasdaq, S&P 500 and Dow Jones Industrial Average.

By learning how to read stock charts, these indicators provide the most reliable way to identify both market tops and market bottoms and all points in between. Here’s an outline of how IBD helps you determine an appropriate level of market exposure depending on a range of factors.

These five levels of recommended market exposure take into account much more than just the gains or losses in the major market indexes. This graduated approach takes into account other key factors, such as how many stocks are nearing buy points while forming sound chart patterns, launching successful breakouts, or breaking down. And what is the price action and volume around key moving averages? To stay in sync with rising or decreasing risk and opportunity levels, the continually tracked and updated exposure level also helps investors get gradually in or out of stocks if they start to show signs being overbought or oversold.

So rather than look at individual companies in a vacuum, focusing solely on the best stocks to buy, remember that successful stock investing starts with understanding and staying in sync with the market trend. Keep the odds in your favor by managing your risk/reward ratio based on current market conditions.

  • 0%-20%
    This indicates the highest level of caution. During a market correction, the dangers inherent to a downtrend are high enough that sitting mostly on the sidelines is preferable to aggressive buying. Keep in mind that leading stocks usually correct 1.5 to 2.5 times the general market. That can make a big dent in your portfolio. You can gain a lot of outperformance by keeping exposure low in bad markets and avoiding huge drawdowns. A follow-through day to inform us of a potential change to a bull market. A follow-through signals a time to explore buying stocks again, but gradually. It’s still too early to go fully invested immediately. After all, while uptrends have follow-through days early in their moves, not all follow-through days lead to uptrends.
  • 20%-40%
    At this target exposure level, it is still possible to have a follow-through day to mark a potential improvement in market trend. But the market indexes may still have weaknesses to work through before becoming further invested. For example, maybe few stocks have formed proper chart patterns. Or perhaps leading stocks are not breaking out in good volume, or recent breakouts are failing. How leading stocks are behaving around key moving averages is another of several factors to consider.
  • 40%-60%
    If you start to see increased signs of accumulation in the indexes and several quality stocks begin to offer potential buying opportunities, that could lead to increased market exposure. If such promising trends begin to fade, investors can reduce risk by reducing their exposure accordingly.
  • 60%-80%
    Again, several factors come into play when determining the targeted market exposure level. As an uptrend gains steam and the move is backed by the behavior in leading stocks, sectors and industry groups, more aggressive buying may be warranted. But always remember that these levels are fluid and subject to change. And keep in mind that they are based on what the indexes and individual stocks are actually doing, not on opinions or predictions.
  • 80%-100%
    This is the highest tier of targeted market exposure. Understand that at some point bull markets end. Avoid overly bullish periods of “irrational exuberance.” Just as we gradually increase exposure as the market starts to recover from a downtrend, we also incrementally reduce exposure as the market becomes overheated. Warning signs calling for risk reduction can include factors such as an abundance of late-stage bases or stocks (and indexes) getting too far above a moving average like the 50-day line.
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Stock investing is not an all-on or all-out proposition. This tiered scale helps ensure that investors stay disciplined and diligent — and in sync with what the market is doing. By adjusting market exposure based on these various unbiased factors, investors can be more aggressive when warranted, while taking their foot off the pedal as risks increase.

More Market Timing Signals To Watch

As you track the current level of market exposure in The Big Picture and Market Pulse, also keep an eye on these other factors related to market timing. They will come into play as associated indicators regarding the appropriate level of market exposure at any given time. They serve as complementary clues for understanding how to identify the best stocks to buy and watch.

Follow-Through Day:

A follow-through day may indicate that a stock market correction has ended and a new uptrend may be taking hold. But it is just one signal that we look for to potential mark a shift in trend. Even if a follow-through day occurs, it’s important to keep the level of market exposure in primary focus. Especially choppy and volatile periods or after a severe and extended bear market, the market may flash multiple head fakes or unsuccessful follow-throughs before establishing a strong climb.

Simply put, a follow-through day occurs after the Nasdaq, S&P 500 and/or Dow has been trying to rally higher from a recent bottom. The follow-through — a big up day (+1.25% or more gain) on at least one major index on rising volume — usually occurs on the 4th to 7th day of an attempted rally. While it is not a guarantee, it’s one potential indicator that the stock market trend has changed for the better. (Note that not all follow-throughs work, but no bull market has started without one.)

Distribution Days 

Indicating days of heavy selling, distribution days occur when the market is in an uptrend and a major market index is down significantly. The index should drop 0.2% or more on higher volume than the prior day. Such action is a sign of institutional selling, or distribution.

When distribution days cluster in a short amount of time, it points to increasing weakness in the indexes. That’s why as distribution days increase, the recommended exposure level in The Big Picture and Market Pulse will decrease, reflecting rising investor risk. In other words, as distribution days begin to mount, investors should manage their risk accordingly by reducing their exposure to a weakening market.

But keep in mind that not all distribution days are created equal. Other factors, such as action in the market leaders and indexes around their key moving averages, also comes into play. So while trying to manage your risk/reward ratio, focus on changes in market exposure in The Big Picture and Market Pulse.

Learn More About How To Invest In Stocks

Use the links below to learn more about stock investing and how to invest in stocks using IBD and the CAN SLIM Investing System — and discover how to stay both profitable and protected.

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