As we endure another downside move in the current bear market in stocks, there are some technical analysis terms that come to mind: Bottoming and Bear Market Traps.
Before explaining those terms, it is helpful to understand the two broad categories of investment analysis: Fundamental and Technical. While fundamental analysis looks at the intrinsic value of the market (i.e., what the market is actually worth based on assets, liabilities, cash flow, profits, etc.), technical analysis could care less about what the market is worth. It is only interested in looking at the current trading patterns in hopes of identifying a trend that indicates where the market is headed next. While fundamental analysis takes more of a long-term view, technical analysis is all about the short run.
Without getting too much in the weeds, the term bottoming refers to the process the market often goes through as it sells off over a period of time during bear markets. It sells off, then recovers a bit, then sells off some more, then recovers a bit, then sells off, and…well, eventually it has a final bottom (which is only known well after it occurs) from which a sustained recovery ensues. Bear market traps are just what can happen to investors that think a bottom has been reached only to buy in and watch as the bottoming process continues.
From a technical analysis standpoint, we are certainly going through a bottoming process which can be a bit exhausting. And yes, investors will experience bear market traps which, by the way, are not so bad if you consider you are buying in at reduced prices that will eventually return to and surpass previous highs – happens every time.
So, while anything can happen in the short run for technical reasons, it is important to focus on the time-honored fundamentals of the market that will deliver value to long-term investors. Understanding the nature of technical terms like these can help us to put things in perspective and not lose sight of why we are buying into the markets in the first place.
The markets may be (temporarily) down, but our portfolios are not out – as long as we stay focused! If you have any questions about the latest bottoming, we encourage you to give us a call.