There are several ways to check the market turning from peak to bottom losing more than 40%. So, you may need different strategy for different market conditions. Here are some of my thoughts.
1. Market Cycle: Bottom, Recovery, Peak and Bottom again. When you're at the peak, watch out with stops and be conservative.
When every one is buying recklessly, making money and proclaiming they're geniuses, this is the hint. Another hint is: It happens about 3 years from the last bottom - very rough estimate and it is safer to say from 2 to 7 years.
Double recession (or W-shaped) seldom happens, but today (as of 7/19/21) there is a good chance when the government intervenes too much with bailout money and the EU crisis has not been resolved.
2. Use 50 week moving average like SPY or a total market ETF. If it is below, time to get out. You will still lose some, but you will lose less by getting out earlier than most. Technical Analysis is based on past data, so you cannot recover from past loss but could reduce further losses.
3. Trigger. The internet bubble is easy to spot, but not the last one on derivatives. Usually the particular sector of industries is over-priced. Those easy money will turn to big losses.
4. Newton's gravity law. In general, the market has to take a breather. When you do not see the normal two or three corrections in a year in a rising market, watch out for the bigger correction that will come unexpectedly.
When the market is moving from bottom to recovery, the profit is the largest and using bottom fishing strategies pay the best. Momentum pays from recovery to peak... My point is: Use the right strategy for the current market conditions.
It is a prediction and hope we've more rights than wrongs. The market acts just like a lady and not a rational one. If it is easy to predict, all of us are sipping some fancy drinks in some fancy islands served by some fancy ladies and there are no poor folks. Right?
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(c) TonyP4 2012. Written in 5/23/12. Last updated in 5/23/12.
Disclaimer:
Do not gamble your money you cannot afford to lose. Past performance is a guideline and does not guarantee future performance.
All my posts are for informational purposes only. I'm not a professional investment counselor. Seek one before you make any investment decision.
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