Call us on 1300 794 893

The Experts

Here’s how to play a stock market rally when it comes

Bookmark and Share

A global rebound for stock markets is expected but if you don’t like enduring short-term losses before eventually being right, you better wait on the sidelines until we see how the Trump-Xi Jinping trade talks go. History tells us being a contrarian and buying stocks after a big battering can be a great investment strategy.

As Warren Buffett, the Oracle of Omaha, has lectured us: “Be fearful when others are greedy and greedy when others are fearful.” But timing your greedy plays, as well as your scaredy cat plays, can also be rewarding.

For example, the investor who got into the stock market in late 2008 after a US rescue plan for banks, carmakers and the overall economy was in place saw their investment fall by about 13% between December 2008 and March 2009, when the rebound started. Anyone who waited until the uptrend started might have missed the first jump in stocks but is now better off.

Personally, I like to see the uptrend after a big stocks sell off to be established before jumping on board and right now that’s not in place yet. Overnight, we saw another early sell off on Wall Street being replaced by a new round of buying but the number of buyers versus sellers is changing every day. I want to believe the buyers are back on top before I go hard again with stocks.

That said, the biggest money can be made when you’re the total contrarian and you’re buying when everyone is selling. When I saw my pretty safe SWTZ ‘stock’ at $2.23 before Christmas when it was $2.65 in July, I was very tempted to load up because I thought the market was at its most irrational. It finished yesterday at $2.30 and a 3% gain in under a month on a pretty cautious ‘stock’ investing in some of Australia’s best quality, dividend-paying companies doesn’t look too risky for a medium-term investor.

And that’s the point I want to emphasise — if you invest now or soon and you’d hate losing 5-10% then you should wait until the uptrend is there to be believed.

In the Switzer Report yesterday, which goes out to subscribers, I pointed out that there were four big threats to stocks and two of them have changed for the good recently.

The Fed no longer looks like it will raise interest rates too fast and the US job numbers on Friday say a recession isn’t on the cards soon. However, we still should fear the Trump trade talks but if they get settled before the end of February and Wall Street likes what it hears then I think the uptrend will be firmly established.

Finally, if US company profits, which we’ll soon hear about, come in better than was expected when the stock market slumped over October to December, there’ll be another good reason to buy stocks.

Robert Buckland from Citi Investment Research told CNBC that the market has been too bearish and that a global rally is out there waiting to happen. And I think if the trade drama gets settled soon and US profits look OK to good, stocks will spike.

Locally, we’ll have issues around the Royal Commission recommendations for the finance sector and the upcoming election but I’m sure we’ll go along for the ride. That said, we might not ride as enthusiastically as the Yanks.

I like this statistical fact from Sam Stovall of CFRA Research, who said: “In greater than 85% of all declines [of the stock market] of 5% or more since World War II, the market got back to breakeven in an average of only four months or fewer!”

He also threw this in for the impatient investor: “Finally, the S&P 500 took an average of only 14 months to recover from the more typical “garden-variety” bear market (declines of 20% to 39.9%), causing one to conclude that if an investor can’t wait a year, then they probably have no business investing in equities!”

By the way, our stock market has not entered a bear market recently and the Yanks only fell 20% for a virtual minute. And in the age of computer trading, that makes that event less meaningful, compared to the old days when bear markets were determined by people rather than machines.

Finally, on my Money Talks TV program last night, both Julia Lee of Bell Direct and Paul Rickard (who once was CEO of CommSec), my colleague here at the Switzer Report, both like stocks for 2019 but want to be slow out of the boxes when it comes to buying.

If you liked this article you'll love the Switzer Report, our newsletter and website for trustees of self-managed super funds. Click here for a FREE trial and to hear more of Peter’s expert commentary and advice.

Follow Peter Switzer on Twitter
Follow us on Facebook

Published: Tuesday, January 08, 2019


New on Switzer

blog comments powered by Disqus
Pixel_admin_thumb_300x300 Pixel_admin_thumb_300x300