Bear Market Rallies
Many investors ignore the overall market cycles.
Markets movement is divided into 2 cycles – bull phase and bear phase.
A bull phase is when everything goes up and even mistakes are rewarded. Everything becomes overvalued. DCF assumptions become aggressive on positive growth expectations . Every news is a good news.
When the tide goes up , even stones start floating.
A bear phase is when stock prices start struggling. The upmoves don’t last long. Every good news is discounted . Every news is treated as a bad news. Valuations become cheap and even cheap becomes cheaper. Very few selective stocks can give outsized returns but 80-90% stocks underperform the markets.
The point to notice is that in a bear market, the fall is not in straight line. There are ups and downs. Here many people get confused. They treat bear-market rallies like a bull run has started.
Effort should be on identifying the overall trend – whether it is a bull cycle or bear cycle . It can help in deciding the allocation of one’s funds in different asset classes.
Here is a recent example of bear market rallies in Nasdaq. Till date we’ve seen 14 bear market rallies (>5% upmove in Index) in last 15 months .Every upmove was followed by a down-move.Not a good time to allocate higher amount of funds.
Here is another example from 2000 – the tech bubble.
The fall was not in straight line- many bear market rallis came before it started the bull run.
Stage investing method can help here – to identify the right trend , the right cycle.
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