By Craig Erwin, Ph.D.
According to TheBuySignal, the Dow 30 and the S&P 500 bounced back last week after hitting nearly two-year lows. Why? Perhaps because frugal professional money managers figured that stocks were as cheap as they were going to get for a while. Or perhaps they believe that the stock market is bottoming and may soon rebound.
Historically the stock market has tended to post strong gains in the fourth quarter. According to the Stock Trader’s Almanac, “fourth-quarter market gains have been magical, providing the greatest and most consistent gains over the years”. According to the Almanac, the market also tends to see strong gains in mid-term election years, during the period running from the fourth quarter of the mid-term year through the first quarter of the next. Of course, there are years when stocks see losses or paltry gains at the end of the year, but during most years, stocks rise.
Most people will be ecstatic if the bear market in stocks ends soon and the stock market has a strong fourth quarter. I see it differently. I would much rather the market decline further and stay down for months or even years. That would give me much better buying opportunities than a strong market rebound, which would force me to pay higher prices. Better to buy low.
How do you feel about the stock market? You’re probably shell-shocked after the wild ride this year. But this year is perfectly normal. Stock prices rise and fall, sometimes violently, but the long-term trend is up. To take advantage of that trend, all you need to do is keep buying in good times and bad (especially in bad times).
Although bruised this year, the stock market will eventually recover. It may be a bit early yet, but it will happen, probably when you least expect it. So, when you are terrified and you feel like selling everything, buy more instead. That’s what Warren Buffet does.
What matters is that you keep buying, not that the market behaves in a certain way. In the short term the stock market is unpredictable, but the long run term trend is up. All you need do to capitalize is to keep buying. So, keep buying.
Do you tend to buy low or buy high? When stocks are cheap, are you too afraid to buy? Are you buying stocks now?
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