Identifying Bear Market Bottoms
A 20% return on investment is considered a very good return if it was consistent, however, a 100% return is possible and very realistic if you managed to buy at the bottom of a bear market. At bear markets stocks are battered to the extent that they sell to very big discounts from their original value. If you managed to buy at the bottom, you will make very generous returns, and you may not need to do any further steps rather than watching your portfolio grow in value every day for years.
How to know it’s the bottom
First of all you have to know that determining the exact bottom is not possible but instead you can know that you are close to the bottom. Buying close to the bottom will bring you very generous returns, you just have to look for some signs that can tell you that the market is close to the bottom.
The following are the signs that can help you know that stocks are trading near to the bottom:
- Bad news have no effect:The market always reacts to bad news by going down but when bad news are released and the market doesn’t move or responds with very small reactions then know that stocks won't go down any further
- The market moves sideways: The market never reverses its direction before moving sideways for a few days or even weeks.
- All bad news are discounted in price: When all of the bad news are discounted in the stocks this means that the market is about to start its journey up. For example, if the market went down 20% in one week as a reaction to an announced recession, then what else can bring the market down? The recession which is the worst news has already been discounted in price. If however, new news are being released everyday then you might want to be patient before the news is over.
- Avoid the trap: Just like the sun rises from the east the market moves up after significant drops, if the market went down 20% it must go up 5% in the next two, tree days, or even the next week. Some people confuse this and think that it’s the next bull market but few days later they lose the gains they made. In order not to fall in this trap make sure that the market moved side ways before it moved up.
