A Wealth of Common Sense: The Psychology of Market Tops & Market Bottoms
During a market decline, the conventional wisdom is to avoid catching a falling knife. But what about when a stock moves higher?
One example is Facebook (META). Shares lost nearly two-thirds of their value in 2022. At their worst, shares were down 75 percent from their high. Yet since the start of the year, the stock has jumped over 50 percent. A big chunk of that move came when the company reported earnings.
Is this just a move off the low – known on Wall Street as a “dead cat” bounce? Or is it the start of a new rally? If it’s the latter, early investors have already been well rewarded. Those who pile in now won’t get as good of a return.
One way to answer those questions is to look at market sentiment. Are traders still bullish or bearish overall? Generally, investors are still bearish at the moment. That points towards more of a bounce than a new rally.
Time will definitively tell either way. For investors, it’s important to remember that nobody will time the exact top or bottom in a stock. It’s about buying when there’s a relative value and chance for a move higher. And selling when a stock looks overvalued.
Investors who are “in the ballpark” on those moves can still make great returns.