Well, what a run the market has had over the last two weeks and so you could be forgiven if you were caught off guard. Questions crossing many investors’ minds are:

Did I sell in haste?
Can the market fall further?
Have I missed the run up?
Is it too early/late to come back in if I sold down?
Now the market has improved should I take the chance to bail out?

Did you sell in haste? Most retail investors do – generally buying well in to the run up – even buying at the top - and then selling when the market has exhausted them. This is called the ”retail lag” – always lagging the major players. Remember as an investor you are competing with some smart intuitional investors and fund managers (not all though!). The successful professionals are contrarian investors – that is, for at least a portion of their portfolio they are very much buying against the trend. They generally have great discipline never turning their back on the market. Successful option traders have also had a field day buying calls before the market bounced because they were bullish – being contrarian thinkers they believed that the propensity for the market to fall much further had been significantly reduced.

Can the market fall further? It certainly can. However in all probability it is unlikely to fall below it’s March low of 2673. One cannot be categorical about these matters – it is all about probability or odds if you like. It is possible however, that the market will retrace some of it’s recent move up – that is how markets behave – they move in one direction retrace and move again – this happens whether the market is falling or rising.

Have you missed the run up? No. You may feel you have with recent front-page news but there is no rush to jump in – but it is time to start doing your homework! One thing to remember about the recent market reversal is that it is largely a Banking Sector led bounce with few other stocks in the Top 100 performing similarly. In fact many are still sliding and/or range trading (moving sideways) at best. So it is a matter of picking the sectors that are likely to push on from here rather than picking the right stock. More about this next week.

Is it too early/late to come back in if you sold down? Many people did sell out in disgust and frustration but as with many things in life – if we make a mistake, always the way forward is to admit we have made a mistake– don’t agonize over it – forgive yourself – develop a new strategy and move on. If you are frustrated with the market then take a course on how to better understand the stock market – it is essential that we come to grips with the stock market as in one way or another we all have an investment in equities – whether it be directly, through managed funds or superannuation or the like. So if you did sell out recently try and get over the pain and start doing careful groundwork.

Now the market has improved should I take the chance to bail out? Many people are still ready to bail out – and in fact that is one reason markets retrace. Investors (including professionals) wait for targets to be met and then sell. Maybe some stocks in your portfolio need cleaning up as they may still fall further. Again it is a matter of identifying the likely trend by sector.

So it is not an entirely clear picture – it never is – but some uncertainty has been eliminated. Keep tuned and hopefully you will glean some useful gems over coming weeks!

Successful Trading

Tom Scollon