There are a lot of one-liners and clichés that get tossed around in the stock market. Among the classics, “Don’t fight the tape”, “the trend is your friend,” “Never try and catch a falling knife,” and “Don’t fall in love with a stock” One of my favorites is “don’t confuse brains with a bull market.”
As with most clichés, these one-liners contain more than a shred of truth, especially when it comes to market activity. While most individuals profess to be “long-term investors” (especially during a spectacular bull market with few corrections), I think it is important to keep an eye on the long-term trend. Experienced investors have come to know that the general trend of the overall market has a major influence on the performance of individual issues.
For years I for have written about the incredible investor complacency that builds to a climax from time to time. Embedded in this complacency is the idea that people don’t have to worry about the stock market because they are mostly “long-term investors.” Well I say here is another cliché that comes from boxing and is applicable to investing, “Everybody has a strategy until they get hit.”
Knowing if you’re in a bull market, or even a choppy market (sideways), solves half the problem in selecting stocks. Most stocks rise during a bull market and most stocks decline during a bear market. Therefore, trying to “play” a bear market like a bull market can have drastic negative effects. In fact, many professionals on the floor of the New York Stock Exchange believe that proper analysis of the market’s trend is 60 percent of the process of selecting stocks that perform well.
Because most investors buy stocks in hope that they will go up, as opposed to selling stocks short and hoping they go down, its important to be aware of the difference between market corrections — 5-10 percent declines in an otherwise rising long-term trend — and a bear market.
Most often, because the economy still has steam rolling through it long after the market makes a major long-term top, bear markets get underway with investors not realizing it. This leads to another cliché: “The market leads the economy by six to nine months.”
Why is getting the major trend so important? In a bear market at least three of four stocks will fall. Another cliché is appropriate here,
“When they raid the house, they get them all.”
Quote of the Week: “…the stock market is only a friend to investors who can recognize and appreciate good values: investors who have the courage to buy stocks when they are undervalued, the patience to hold them until the price moves upward, and the wisdom to sell when the stock become overvalued.”—Geraldine Weiss
Bart Ward is the chief executive officer of Ward & Co. Ltd., an Anoka-based registered investment adviser – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.