With the positive action in the markets of the past few days, it can be easy to get wrapped up in the optimism of thinking we’ve bottomed and it’s safe to get back in the water.
Many analysts believe this pop is a result of a few different factors and think we could have further downside. Here’s why:
- Historically, the market rises 4-5% at the very end of each year before selling off in January.
- The significant pops we’re seeing are following huge drops – we’re incredibly oversold and that adds to the upside action during a bounce.
- We still have a number of very bad news events on the horizon: the U.S.-China Trade War; Federal Reserve rates and balance sheets; a weakening economy; difficult year-over-year comparisons for 2019; and the unknown (who knows what else is out there?)
- The first quarter of the year is historically a bad time for the markets, even during bull markets (remember the beginning of 2018?).
So, what’s an investor to do?
Remember our rules for Not Slipping Up on Green Days.
You should do your buying on Red days and do your selling on Green. Although this seems counterintuitive, buying into a rally is as dangerous as selling into a sell-off.
There’s an old stock market adage – the market takes the stairs up and the elevator down. Basically, rallies are slow-moving with a lot of sideways action between moves while sell-offs happen fast.
You can take advantage of this by waiting for the sideways action before adding to positions, preferably on red days which are far more likely in a bear market like we have currently.
As we look at the last trading day for 2018 on Monday, you should consider lightening up on any recovered positions where you’d like to take profits and don’t do any buying until 2019.
Avoid feeling FOMO if you missed the upside of the past few days; it’s almost a sure thing you’ll have an opportunity to get in at lower levels (even if we have already bottomed).
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