After the long bull market was reanimated by Trump’s election pundits have repeatedly sounded the alarm that a correction if not a crash is coming. Now we have had a couple of down days and the question rises, when to buy as the market falls. Because, markets don’t stay down forever and there are profits to be made in buying at the bottom when a new rally starts. CNBC writes about stocks to scoop up in a declining market. Suggestions included buying the euro, iShares MSCI Turkey ETF, Coach, Jet Blue and Wynn Resorts. The precise reasons vary but in each case the stock fell recently and shows promise of growth despite the current market decline.
When and Also What to Buy
Famous long term investors like Warren Buffett say that they cannot efficiently time the market but they do buy and sell and make a lot of money along the way. Publications such as Value Walk refer to marketing timing as a dirty word. But they still write about adjusting their portfolio. Stocks that will recover well after a down market are those with good fundamentals. Our sister site, Profitable Investing Tips writes about intrinsic stock value.
The dictionary definition of intrinsic stock value is its fundamental value. It is obtained by adding up predicted future income of a stock and subtracting current price. It can also be seen as actual value of an equity versus its book value or market value. The concept of fundamental analysis of equities evolved from this concept. Using fundamental analysis the intrinsic value of a stock is the expected company cash flow discounted to current dollars. It is a discounted cash flow valuation. An inherent weakness in this concept is that too often the medium and long term prospects of a company and its stock price are not clear. So, what is intrinsic stock value of a company if the future is uncertain? The ability to see into the future to see how well a company will manage its assets, products, costs, R&D, and marketing is of utmost importance in calculating intrinsic stock value as a means of deciding whether or not to purchase a stock.
Stocks with strong intrinsic value are those that were already undervalued by the market. Being unjustly taken down by the falling tide that sinks all ships just makes them better deals. Then comes the question when to buy. This is the province of technical analysis.
Day traders using technical analysis rely upon the fact that investor sentiment and action tends to repeat itself. Analysis solely based on technical factors is a kind of statistical prediction. Statistics does not predict which investor will buy which stock at which price but it does often predict that a certain percentage will buy or sell certain types of stocks.
An example of technical analysis is when the market is very bullish on a stock. That typically means that those with money and interest have bought the stock already. With fewer buyers left over the odds begin to favor a downward movement of the stock with any flicker in the stock price as those who have gains will often take profits. The profit taking causes more profit taking and a substantial correction sets in caused by herd mentality. The day trader steeped in technical analysis can short the stock and ride this correction down to a support zone, making profits along the way.
When to buy as the market falls is when the technical indicators say so.