(In one of the other thread that I post, someone asked me a question yesterday. In the recent bounce that we got, the poster sold some of the shares, expecting to buy back at roughly 20% lower due to rate rise decision next week, looming recession etc. I had a reply which I think could be of interest here as well. Still want to caution that markets are still volatile and one bad news can have big drops, majority analysts still bearish, general trend is to be defensive, so please check for yourself)
These are just my thoughts and I could be wrong, so please dyor.
First of all, its very difficult to predict what is going to happen. Most people are taking a stab. Because of the big fall in first 6 months of this year, lot of people have lost hope and have become bearish. The future also is blurred with lot of challenges, and any person who is very risk averse would think twice before entering at this stage.
If you read my last weekly report (in the MLS Weekly Report thread), I have given 3 examples where most people are not getting it right. And these are people who do these predictions for their day to day living and have tonnes of experience. So its not easy to say what is going to happen.
Personally I also missed a trick. When the decline started, I did not immediately sell. But after a drop I was able to exit 50% of my stocks at a reasonable time. Those prices are still 40-50% above current prices. After that for a month I was only day trading.
I did a lot of research in last couple of months. Read/heard whatever was available. I started buying around the last week of June, just over 3 weeks back. I bought back nearly 60% of my cash in the last 3 weeks. But I am also a short term trader, I sold some in last couple of days to lock in some profits and rotate the stocks. I have seen some stocks move in first stage, some later. If market is recovering, usually big stocks will make first move, then they will stagnate. The small to mid caps will then move. So accordingly I rotate.
So why did I start buying when many analysts are still saying to be defensive?
There are a number of reasons, but you have to accept that each person is different and their risk/reward tolerance can be different. So what I may do, may not be right for others. . Some of the reasons I bought: The stocks had fallen a lot. Eg Few US indices had a drop in their value in first 6 months, which had never happened before in the history of stock market. I know it can still go down, but one would think, the fall from that low should not be much. This is just based on looking at the magnitude of drop and no other indicator (ignoring recession/interest rate etc). So I thought risk reward is good. It could still happen that they could keep on going down
Most of the stocks bottomed on 23rd/24th June. You can go to any stock and check their price history - most made their current bottom on those 2 days. Then they rebounded. I did not buy the bottom except for day trade. I observed for a few days and after stocks rebounded a bit, they started going steady. I started buying just after that. That was the first time I started buying and holding - its all there in my posts. As the days passed, and stocks were more steady and not looking to go to that bottom, I kept on adding.
Like you I was very apprehensive about upcoming events - initially CPI, PPI, and earnings report. Most of the data came below expectations. Stocks declined a bit, but there was no sell off. That reinforced my thinking that a lot of bad news is already priced in
Many analysts were bullish and saying that we have seen the bottom - June one which I mentioned. Though they were not in majority, but in one way convincing.
Even many bears had turned their tone a bit, yes only a bit. Bears are more like activists, and their tone is mostly condescending, ridiculing anyone who is bullish. Just go to XJO thread and you will understand what I am saying. But some of the analysts whom I read started saying - At this stage we are more close to bottom than to a high for next 6 months. So they felt we could go down a bit, but then may turn and get over above current price. So risk/reward was visible even from bear mouths.
Few other things - charts etc. eg in the last few days indices have moved up 50 day moving averages. Lot of people follow that and start buying when that happens.
The volatility index VIX has remained steady and not very bearish. Many had predicted that if we have a meltdown, the VIX would shoot over 30, much higher. But even in recent downturn it was below 30, hovering around 26/27. Today it is at 23+. So it is showing that punters are not in a crisis mode, rather they may be steady or bullish. The bond volatility index was much higher - panic. Many said that VIX is incorrect. But the way market has moved in last few week, looks like VIX may have been right.. .
From here anything can happen. One thing I have learnt is to have tight stops if things don't go in right direction. Many are still predicting doom, not just for next 6 months, but for years. They could be right, so nothing is off the table.
Regarding next week rate rise in US and then in Australia - my gut feel is it is already priced in. Now for the stocks to fall big, we need a bigger bad news, something which we don't know now - some new very bad news. It can come in the next few days/weeks or even months and everything can collapse - but something new may have to come. Otherwise, it may be that we don't immediately have a big rise and it is slow grind - 2 steps up, one step back - and slowly make our way up. But a number of parts of economy is still doing well - we could have a good rise in next 6 months. Although not full convinced, I am hoping for that and preparing accordingly. Every day I can evaluate and see where we are and accordingly take step.
Hope this answers some of the things you asked. Nothing is certain, but its better now than last month. All the best.
(20min delay)