With the current U.S. stock market continuing to trend down, many people are looking to history for possible outcomes, and rightly so. Today’s stock market situation is trading at an important historical level.
Investors and traders alike, are trying to figure out on a daily basis whether there are more downside levels to be broken, or if this is the bottom.
The argument for this being a bottom is that we are now down between 45{9e6afc18e04fc5fa66224b06488e691531267e3d6804b0d35af7d6b75debefc2} and 50{9e6afc18e04fc5fa66224b06488e691531267e3d6804b0d35af7d6b75debefc2} from the peak of the market and this is comparable to previous bad recessions. Another argument is that most, if not all, the bad news is already priced into the market, which is why it has fallen so much to date.
Others argue that there is still more bad news to come, some say much more bad news, which will take the stock market to new lows in the near future. There are also people that look at the “down 45{9e6afc18e04fc5fa66224b06488e691531267e3d6804b0d35af7d6b75debefc2} to 50{9e6afc18e04fc5fa66224b06488e691531267e3d6804b0d35af7d6b75debefc2} is far enough argument” and point to the declines seen in the stock market during the Depression of the 1930’s as well as the Japanese stock market starting in the late 1980’s up until today. In my opinion, rightly so.
As far as the argument stating that the markets are now down 45{9e6afc18e04fc5fa66224b06488e691531267e3d6804b0d35af7d6b75debefc2} to 50{9e6afc18e04fc5fa66224b06488e691531267e3d6804b0d35af7d6b75debefc2} is concerned, while this is true, the current situation in not only the U.S. economy, but the global economy, is in unchartered territory. Anyone who says we have seen this before should probably be in the group looking back to the Depression era in the 1930’s.
The stock market also has historically found a bottom and turned up several months before the economy has. But how do we tell when the economy is going to start getting better?
Some patient investors only put their money to work in new investments after the market starts to turn up and things are showing signs of getting better. If you take a look at the most recent Unemployment reports you will see that nothing is getting better any time soon, but in fact is continuing to get worse.
Whether this is the bottom or not, a key component of successful investing, or trading for that matter, is to have a plan in place ahead of time with risk and money management rules in place, and to stick to your plan. Many buy and hold investors have no exit rules in place and some of them have held positions in companies like Lehman Brothers, AIG, General Motors, Fannie Mae, the list goes on and on. If these investors had an exit rule in place to protect profits, or at least minimize losses, they would have gotten out a long time ago.