Protecting Yourself in a Shifting Market

How do some investors maintain their financial success when the stock market is an ever-changing environment?

Sometimes, certain factors can bottle-neck, causing the entire market to be affected.

In yesterday’s issue, we discussed individual factors that could cause certain investments to improve or worsen, depending on market conditions.

Shifting markets can be attributed to changes in the factors that many traders only correlate with the fluctuation of their portfolios.

Today we will review what you should do when the entire stock market experiences a downward shift. And how the type of market in which you are investing can give you clues about how to act on certain trends…

What Are the Effects of These Factors Combined?

What happens when all the factors we discussed yesterday are combined? In a nutshell, the entire stock market experiences a downward shift. Here’s how it goes down:

Decrease of Consumer Spending Capacity

First, what happens is that with stock prices going down, there’s a reduced spending capacity.

Decrease of Business Profits

Lower stock prices plus reduced spending capacity leads to a decrease in business profits.

Decrease of Investor Confidence

Once business profits go down, investor confidence takes a nosedive, and all of a sudden, company stocks are no longer as desirable.

Increase of Stock Selling

When the value of the stocks goes down, investors want to unload. This means a big supply is unleashed on the market. 

Decrease of Stock Demand

When there’s an increase in stock shares, there’s less of a supply-and-demand balance. If there are too many shares, they’re no longer as valuable.

Decrease of Stock Price

Ultimately, the stock price goes down because there’s a lot of stock, little demand, and the market is stagnant.

Understanding the Stock Market Trends: Comparison Between Bull Markets vs. Bear Markets

The market type can give you clues about stock market trends. Here are some predictable trends that take place in bull markets and bear markets, respectively: 

1. Market Type

A bull market is a more aggressive, optimistic, and forward market. The bear market is a more sluggish, cynical, pessimistic and downward market.

In a bull market, the market is optimistic and forward-moving, which means prices will go up. In a bear market, the pessimism and lack of investor confidence can lead to declining stock prices.

The shifts can be subtle, though, and sometimes it’s not easy to discern which type of market we’re in.

2. Economy

When we’re in a bull market, the economy is generally overall very strong. It’s like a rising tide that lifts all boats, and stock prices go up.

On the flip side, during a bear market, the economy tends to be weak. This can lower stock prices.

3. Unemployment

In a bull market, unemployment tends to be low, and more people have regular jobs, whereas the opposite is true of a bear market.

4. Consumer Spending Capacity

Characterized by a stronger economy and more employment, a bull market is prime time for consumer spending capacity, which is usually very high.

Not so during a bear market, where consumer spending capacity is far lower.

5. Business Profits

Business profits tend to increase during a bull market, as opposed to a bear market, when they typically go down. 

6. Company Stocks Valuation

Be sure to look at the company stock valuation. In a bull market, stocks are highly valued. In a bear market, they are devalued.

7. Stock Supply

In a bull market, there’s usually a low supply of stock. In a bear market, there’s typically a high supply.

8. Stock Demand

Given the stock supply goes down in a bull market, more demand is created. In a bear market, the higher amount of stock available leads to less demand.

9. Investor Sentiments

In a bull market, the investor sentiments could usually be described as positive and confident. In a bear market, it’s typically under confident.

10. Do Investors Take Risks?

In a bull market, sure investors take risks; they’re feeling confident and the economy is strong. It’s the total opposite in a bear market — seemingly nobody wants to risk anything.

11. Buy and Sell Trends

That’s easy: In a bull market, investors tend to buy buy buy; in a bear market, it’s sell, sell, sell.

12. Stock Prices

You’ve probably already guessed this, but in a bull market, stock prices increase. In a bear market, they decrease.

Key Tips For Different Stock Market Scenarios

So what’s a trader to do in different market conditions? Here are some tips for making the most of your trading strategy no matter what the current market looks like:

In a Bull Market

Are we in a bull market? If so, consider these principles:

Recognize the Trend Early

If you can get ahead of the masses, you can maximize your profits. This means that you have to be able to identify the trends that are shaping the market before anyone else.

Look for Smart Stocks

Be intelligent in your stock choices. For instance, right now cannabis stocks are the hot sector, so it’s smart to look there. Other stocks may prove to be good seasonal investments.

Be intelligent and stay with the trend. Gain that edge and you’ll be more likely to make better trades. 

Hold On For the Ride

By looking at the stock’s patterns that may tell you how long it may trend upward and plan your exit strategy accordingly. But while a stock is hot, it’s the time to ride.

In a Bear Market

Are we in a bear market? If so, consider these principles:

Short Sell

It’s time to short sell when we’re in a bear market, where it’s like hibernation.

When stocks are going down in value, as they tend to during bear markets, it’s the right time to short sell.

Short selling is the opposite of the typical “buy low, sell high” approach to investing. In this case, you’re actually hoping to find stocks that are going down in value.

First, you borrow these shares from a broker, and then you sell them in hopes that they will continue to lose value before you buy them back.

So you’ll briefly take a negative position before rebuying them, hoping to profit from the difference in price. It’s recognizable as a buying/selling transaction but conducted in an unusual way.

U.S. Treasury Bonds

U.S. Treasury bonds can be a great place to look during a bear market. This is because good interest rates tend to rise during bear markets, providing an attractive opportunity during times of economic uncertainty.

Defensive Stocks

Utility stocks such as energy and water are considered defensive, as their value stays pretty constant regardless of the market. This provides a way for investors to keep money in the stock market with limited risk.

Master Your Analysis Skills

Regardless of what type of market we’re in and what stocks are doing right now, you need to work on mastering your analysis skills to make the most of any market.

Stock analysis is exactly what it sounds like: the process of analyzing stocks. As a trader, you will use many different methods of analysis to determine whether or not a stock is going to work with your overall strategy.

While there’s not one cut and dry approach to stock analysis, there are two key types of stock analysis: technical analysis and fundamental analysis. Most of the research you perform will fall under one of these two categories.

Technical Analysis

With technical analysis, you’re looking at the stock’s documented number action. You’ll rely on charts, numbers, and historical data to review a stock’s performance over time.

By looking into a stock’s past, you can begin to identify patterns. If it seems as if the stock follows a reliable pattern, you may be able to predict how the stock may perform in the future.

These are some of the things to look at when you perform technical analysis:

  • Price changes over time. How sharply, and how much has the stock’s price changed over time?
  • Trends in price. Has this stock traditionally been a gainer, or a loser, at particular times? For instance, is it frequently peaking during a certain season or time of year?
  • Patterns. Both the price action and the price trends can help you start to look for patterns. When you look at a stock’s chart, sometimes you can actually see physical patterns in the action of a stock, which can help you try to figure out if they’re predictable.

Fundamental Analysis

Stocks and the market are all about numbers. But the people who buy them are human. That’s why it’s important to also consider who is selling the stock.

Public opinion can have a huge effect on the price of a stock, so it’s a good idea to do some research on aspects of the company in question that could affect analysts and buyers. This is called fundamental research.

Looking at the company in question can help you identify catalysts that could play into stock price movement.

Consider these things when going through your fundamental analysis:

  • Earnings per share. The earnings per share (also called the EPS) is a calculation where you divide the company’s profits by the number of outstanding common shares. This is a metric that many traders consider vital.
  • Earnings. Look at the company’s earnings reports. Quarterly earnings reports are required by the SEC, and this is where you’ll discover the truth about the company’s bottom line. You can see if they are exceeding sales goals or not, what their profits and losses are, and read about what the company’s plans are for the future.
  • Be thorough. When it comes to fundamental research, separating the wheat from the chaff can be tough. What news is self-serving, and what is the truth? Consult a variety of sources and be sure to look extra close at the small print in that earnings report. 

The Bottom Line

There are a variety of factors that can affect stock prices. These include but are not limited to inflation, interest rates, energy prices, oil prices and international issues like war, crime, fraud, and political unrest.

Spikes in price are extremely difficult to predict but based on history, the stock market always rises over time and investors can make estimations of how the market will react to different influences and events.

Recognizing a trend, hopefully before the curve, in an individual stock or the broader market will help you determine the best times to buy and sell.

However, over time, research shows that investing in strong companies with growth potential pays off more than rumors and guesswork!


— Tim Sykes
Editor, Penny Stock Millionaires

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