To buy low and sell high is a common market timing strategy and an age-old mantra. Investors use methods to determine where stocks and markets are peaking or at low levels.
Wait too long and you’ll experience the stock’s next low. If you are too quick you might miss out on further gains. Investing in the stock market is an exciting yet volatile art. Unfortunately, it would not be so if it were an easy task to predict a drawdown.
In reality it is not possible to know when a stock, instrument or market has reached a high or low until after the fact.
A stock or instrument may ‘look’ high and continue trending or ‘look’ low and stay low.
In January 2014 IBB (ETF for Nasdaq Biotechnology) was considered to be trading high.
However, as evident in this chart, it went higher, much higher, it’s now 51% higher.
This is an excellent case study of investing with the trend.
Forming a view based on non-technical factors
There are a number of non-technical factors to consider to better understand the movement of stocks, instruments and markets.
– The cost of doing business
There are several factors that can increase the cost of doing business, hurt consumer confidence and influence markets. Some include:
- Inflation – the increase in the cost of goods, along with a decrease in the value of the dollar
- Energy and Oil prices will impact upon consumers and businesses as prices go up
- Interest rates – affect home mortgages and the cost of borrowing money for businesses. Lower interest rates are a double-edged sword, whilst they mean less expense, they can also be interpreted as a sign of a slowing economy, which can negatively affect confidence
– Global affairs and sentiment
Government policies, conflicts, diplomatic relations, technology news, trends in popular culture, issues in public discourse, natural disasters, amongst other events are all contributing factors upon investor’s confidence and trading decisions.
– Fundamental factors
Fundamental (balance sheet) aspects are another consideration. For example, the market can respond to bi-annual earnings reports in a number of ways. If a company announces strong financial results some will seek to buy the stock (raising the price), while others may sell interpreting this to be the peak of the organisation’s performance. Equally a poor financial result could see the stock sold off, or bought if investors see potential for future improvements.
With such factors considered, amongst others, stocks are still traded. In implementing a trading strategy it is important to understand the existence of micro and macroeconomic factors which have a part to play in market movements. However, the most successful trading or investment strategy involves technical analysis or more specifically mechanical investing – this allows for timing markets, instruments and equities and, importantly, automatically takes into consideration the net effect of all factors combined without the investor needing to know specifically which factor did what on any particular occasion.