Saturday, October 11, 2008

The Trouble with Calling a Bottom

Recently, I've heard a lot of chatter from various pundits about whether they are "calling a bottom" or not. Not surprisingly, some are saying we are at or near the bottom while others proclaim that we still have a ways to go. Who's right? Who knows? I believe the answer, as always, is: "No one knows." It is the same problem as with all prediction; none of us knows tomorrow's news.

Trying to pick a bottom can be a dangerous practice in trading. Naturally, we don't want to miss the turn and we know that there are going to be a whole lot of great opportunities when the markets eventually turn back up. If we decide that the market is at bottom and it is time to buy stocks, we could be wrong. If we do make that decision and begin to enter bullish positions, we would be well off to have a pre-determined exit just in case our belief was mistaken. I also suggest entering positions that are only a fraction of the size we ultimately intend to have. Gradually test the waters rather than diving in head first when we can't see the bottom. It is OK to miss part of a move. In general, entering once a trend is established can enable us to take a piece out of the middle. I've heard it said that we only catch one perfect top and one perfect bottom in a lifetime of trading. Whether that's exactly true or not, I'm sure you get the point.

When we are trading, we need to remember that we are at the right side of the chart. No matter what we predict, we could be wrong. Does that mean we shouldn't trade? For some, definitely. For those who really want success, they need to apply discipline in setting exits, in assessing reward to risk potential, and in managing money.

Personally, I think we have not yet hit bottom and even if we have or when we do there will be a retest after a bounce. That is what I think, but I can tell you unequivocally that what I think or what you think has no bearing on what the markets will do or on when they will do it. That is why we need to understand the need for discipline and create a trading plan that incorporates the elements I discuss in these articles and in "Trade Your Way to Wealth".

by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
All Rights Reserved

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Anonymous said...

Bill suggests it is hard to pick tops and bottoms. I have found it very easy to pick tops and bottoms. My only problem is that I go long when I pick a top and I go short when I pick a bottom.
Jerry C.

Unknown said...

Mr. Kraft,

First, I find you to be one of the better (as in reasonable, realistic, informed, mature and honest) voices out there in 'finance land'.

Whenever I read or hear one of the many prognosticators who speak of 'when' the economy turns around, which is right around the corner, the 2nd corner at the farthest, 'when' the value of people’s homes begin to rise or 'when' the stock market turns around, because it will because it always has, I would like for someone to ask, "How? What is in the pipeline which will cause this to happen?"

There is no historical perspective or precedent for these times, nor for the future before us. Our problems are not limited to the financial sector. There are also the matters of our energy system, the consequences of climate change and environmental degradation, unemployment and inflation numbers (even using the 'official' figures, for which the calculation processes have been so manipulated so as to render them relatively meaningless) have passed the 'tipping point' at which they begin to feed off of themselves. Unemployment decreases spending, which leads to more unemployment....…… Higher prices result in consumers buying less product, which results in more unemployment....…. Shortages of vital resources, etc.

I am reluctant to use the term "perfect storm", as it has been overused to the point of clique; however, we are in it.

Anonymous said...

We need are at the right side of the chart.

But in the Trading Service, you only recommends bullish trades, on downward trend charts.

I would like to know why this inconsistency.


Bill Kraft, said...

Jerry C, ain't it the truth? Thanks for the great comment.
Bill Kraft

Bill Kraft, said...

Thanks for writing, Ron. Indeed, things are bad in the financial world. None of us knows where it will go, but on the positive side, we are seeing what must be considered some great value buys emerging in the markets, at least from a traditional perspective. I am seeing quite a few companies, for example whose book value is higher than the share price. In other words, the "break-up" value is greater than what we can now pay for the stock. P/E ratios have fallen dramatically and that, too, suggests value. Markets generally respond to value and though problems still exist, there are positives out there as well as negatives.
Bill Kraft

Bill Kraft, said...

Hi Mark. As I have written many times, Trend Trader is purely a bullish service that is why it only recommends bullish trades. The same is true of $10 Trader. Of my three services, only Option Trader includes bearish plays. Most subscribers are stock buyers so that is why the services are designed to be bullish and that is why I have made very few trades recently in Trend Trader and $10 Trader and regularly written in the Weekly Summaries to paid subscribers that cash is a good place to be at the moment. There is no inconsistency. I have been saying this all along.
Bill Kraft

Anonymous said...

I don't think we've seen the bottom. But what do I know? Not much. One person I know predicts that the Dow will fall below 3000. I suppose it could happen. At this point all bets are off. But if you consider the ramifications of the Dow dropping that far, that's really scary. Confidence non-existent .... crime, suicide, divorce .... all up.

Anonymous said...

I believe predicting the top or bottom depends on the timeframe you play. I think the bottom could be zero based on the monthly timeframe, but of course the extention is so big that a bounce is near. Waiting on a reverse on daily base is an option I think.

Ivo Leclère from Belgium