Definitely, this is a ”Big Question” and if you know the answer, you may be well ahead of the game.
Investors and analysts alike are asking themselves if we have in fact seen the worst that the stock market and economy has to offer. There have been signs as of late that signal that the economic plunge is leveling off.
It is very much likely the Dubai Financial Market and Abu Dhabi Stock Exchange to have bottomed out last week, but calling a stock market bottom is tricky.
However, some indicators can increase your chances of spotting a market bottom early enough to cash in on the first big moves.
A stock market bottom will always signify the end of a bear market – a condition where shares prices have been falling over an extended period of time to reach fresh lows.
The start of a bear market is generally defined when major stock market indices dropp in price by 20% or more over at least a 2-month period of time, which happend lately on the DFM and ADX. The length and severity of bear markets vary, but one thing is for certain – people lose money.
A small group of sophisticated investors realize that during a bear market everything is on sale. They also know that fortunes are either lost, or made and they plan on being on the gain side of the equation.
Many investors listen to the news to find out when the bear market has come to an end and have reached a bottom. However, the sad truth is that media is a lagging indicator as to the true condition of the stock market. News channels always reveal facts substantially late and by the time they share the news, you have missed out on all the big moves. In fact, when you do not hear or read much about stock markets, it is the right timing to take positions.
So, how do you know when the stock market has bottomed out and it is moving on to a higher territory, where you can recover your loses and gain money?
Capitulation is a a strong sign of a possible bottom in prices, because almost everyone who wanted or was forced to sell stock has already done so, leaving the buyers in the market, who are expected to drive the prices up. A threshold is reached after a severe fall, when large numbers of investors can no longer tolerate the financial losses incurred. These investors then give up and liquidate their holdings, which triggers a further decline in the stock’s price, if not already anticipated by the market. Margin calls, mutual fund and hedge fund redemptions significantly contribute to capitulations usually. Trading volumes are drastically reduced during such periods.
Calling the bottom of the stock market is a game played by many investors and traders together. Market players do not want to be left out, once the bear market is over and the stock market bottom is in place. Once the stock market has finally bottomed out, it rallies once again. Only this time it is the start of a new up trend.
Local markets showed some positive signs last week. The mood in the markets the world over has clearly taken a sharp turn for the better, partly because of the results of the latest summit in Europe and partly due to somewhat more encouraging data from the US. The Saudi stock market Tadawul closed 1.43% higher at 6,235.64 points Saturday.
It is time traders and investors to return to the markets.[mpoverlay][/mpoverlay]