Evolution of Bear Market

Evolution of Bear Market

Mini bear (short term downtrend) and mini bull (short term uptrend) usually would take turn in uncertain markets until a major trend (longer term trend) is confirmed.

As of now, US short term stock market is losing short term momentum with S&P500 below intermediate support of 3000 points (was a critical resistance before that). The current global stock market correction of about 10% has reflected the initial fear of Coronavirus, similar to Asian stock market 5-8% correction during lunar new year in late Jan to reflect the initial fear of China Coronavirus condition.

Currently it is still fear driven stock market correction but when the real economy is affected with longer period of pandemic (over 6-12 months) with manufacturing supply chain broken, reduced spending globally (less tourists, less shoppers, less spending), then the big bear will not be too far as it would be fundamental driven (country economy will fall and many business which depends on consumers would be less profitable or even making losses), share prices would be bearish for over 6-12 months, worse if coupled with falling of stock market from high optimism.

Therefore, whenever stock prices up or down, evaluate if it is fear or fundamental driven. Coronavirus crisis so far on stock market is still fear driven but having potential to be fundamental driven when dragging too long.

New virus (stock market is at mercy of Coronavirus):

-> initial spreading, initial fear, stock fall 10%

-> more spreading (pandemic), more fear, stock fall 20%

-> quarterly economy falls, more fear, stock fall 30%

-> yearly economy falls, great fear, stock fall 50%

-> continue the downtrend circle of stock <—> economy until Low optimism at L3 to L4 (world level)

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Market Signals from Bull to Bear

Market Signals from Bull to Bear

Global Bond Market has been at historical high prices over the past few years. It is possible that the crash of bond market could be the next black swan. Currently the funds from bond market is transferred gradually to stocks, properties or safe cash in banks. The changes are still not an alarm yet but if both stock and bond prices drop significantly over a period of time, an investor would have to be very careful on potential market signals from bull to bear.

This is the characteristic of last phase of bull run with high prices, any drastic movement will shake the confidence of investors who have high profits in stocks. The solution? Sell some as well to take partial profits. The initiation of market signals from bull to bear is not confirmed yet.

VIX (Volatility Index) is shooting up to more than 17 but the uptrend fear may not be sustainable.

During 911 time, a drop of 600 points overnight is about 5% to Dow Jones, considered a disaster. After Dow Jones is doubled since then till now, the impact of the same drop of 600 points is only 2.5%.

We need to compare the stock market in both relative and absolute ways. A stock market cannot be bullish every week, needs to take a rest, allowing some people to take profit and some people to enter the market again.

Since the global stock market is over 80% Optimism, US more than 90% Optimism, it could be a smart move to adopt a shorter term position.

High Optimism = bonus price, we want to sell high to others. Low Optimism = discounted price, we want to buy low from others. Stock market has returned the last 2 months of bonuses (gains) after the correction so far. Each of our unique personality will determine the unique low and high optimism, forming a personalized trading plan or investing strategy.

A stock trader would not capture the falling knife, waiting patiently for the uptrend to come back again after breaking the resistance to form higher lows. Global stock market is “tired” after the bull is running for so many months, need time to rest. A trader would not guess the direction of market or future prices but self-discipline is important (entry, take profit, cut loss, position sizing, etc). An investor would use the market greed and fear as additional weapon to fundamental analysis. Ability to take actions aligning to own personality is key to success.

Eventually the train will reach the terminal of “Bull Line”, changing the direction to “Bear Line”, these are market signals from bull to bear. Knowing the risk tolerance of oneself is critical, knowing when to alight. Before changing the lines from Bull to Bear, we will see some road signs, now a few are shown, more will be seen in future.

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