Understanding Bearish markets
Market is said to be bearish when it keeps falling for a prolonged period of time. The common thought that creeps into our mind is about triggering event causing such a prolonged downfall. There can be many reasons like economic recession, political events like war and invasions, decrease in corporate profits, stocks being overvalued etc. (Also see what is a Bull market and Bear market?)
The question arises now what keeps it to remain bearish for such a long duration? Consider yourself stuck in a stampede struggling to save your life. You will make every effort to get out of it. Similar is the situation of an investor who speculates huge losses in bear market and wishes to avoid them. When market shows downtrend continuously, selling pressure continues and there are no potential buyers in the market. This creates panic amongst the investors who wish to make an exit by booking nominal profits if they find themselves lucky enough. This situation which leaves selling as the only option keeps the bearish market alive.
What does bear market has in store for you?
The only rule of finding hidden treasure in bear market is to be optimistic and observant of market movements while everyone is rushing out to seek shelter. The reason is simple as indicated in diagram below. There is always a cyclic trend wherein after a period of recession, market recovers and finally booms.
Think of a pendulum which has to come back to its original position and rest assured that bears will turn bullish. The only catch is how to decide what to sell from your current holding and what to buy for further gains.
While selling keep two points in view. First, don’t bother if you don’t book profit; make sure you are not into losses. Second, don’t sell because everyone is selling. To choose the ones to be sold, revisit your portfolio and study the fundamentals of stock. If the stock is overvalued with high P/E, don’t wait much and sell as you get the opportunity. On contrary, if a stock has stable balance sheet and good performance, it falls following the market trend and will surely rebound.
While buying, a wise investor would surely gain; just be prospective. First, if you are long-term investor, identify the recession-hit stocks with good fundamentals. These are a good pick because they are trading low following the market trends. Once market recovers, they will follow the suite. Secondly, blue chips have been a buyer’s choice in such markets because they are the market movers. So keeping in view that recession will be over, they can be most relied upon. On similar note, better stay away from penny stocks. Thirdly, invest in stocks based on items of necessity like FMCG, telecom etc. rather than luxury items because even if the whole economy is in recession, human’s basic needs have to be fulfilled and these stocks will never die out.
The crux is be optimistic and keep investing because sometimes your good investments are the ones which you don’t make.