If real estate is all about location, location, location, timing could probably be the magic word for the stock market. The right time to buy and sell your stocks is what spells the difference between profit and loss. While the importance of timing is understood easily enough, determining what the right time is, is easier said than done.
Now there are those who swear by stock market trends as a reliable way to figure out the right time to buy and sell. And there are those again who think reading trends is akin to asking for advice from a magic 8-ball. For those of you on one side or the other, or have yet to form an opinion, we take a look at looking at trends, and other ways for getting your stock market timing right.
Before anything else…
…we’d like to point out that getting the timing right for buying and selling, doesn’t mean getting it exactly right. Buying a stock at its lowest ever price, and selling it at its highest ever, is something even the most sophisticated of investors hardly manage to do, if at all. Investopedia points out that what investment genii like Warren Buffet and Peter Lynch do is to focus on buying at one price, selling at a higher price, and sticking to these prices.
We’d also like to note that our look at trends and methods for timing your buying and selling on the market, is just that — a look, not investment advice.
Selling For the Right Reasons
Investopedia warns against succumbing to what they call a “casino mentality”, or waiting (and waiting) for a stock to reach a higher price. If and when the stock drops, an investor with this mentality usually ends up frustrated at the long wait and selling below his initial buy price.
So if the ol’ “wait and see if the stock price goes any higher” is not a good reason to time the cashing in of your stocks, what is? A stock spiking on the market is a very good one — when a low stock price shoots up in a short time, for whatever reason, it’s a good time to sell. Even if the share price keeps going up, at least you know you didn’t play the waiting game. And if it goes on to drop, the chance could come along for you to buy it again.
Another good reason to consider selling your shares, although not a hard and fast rule, is if the company’s valuation becomes a lot higher than others in its industry.
Three Trends to Watch
Now if you are among those who prefer to look at trends, or for signs that your shares are ripe for selling, The Simple Dollar offers three things to keep an eye out for:
1. Recent Spikes. Whether they’re skyward or the other way round, spikes mean something major happened to the company that could affect the value of its shares.
2. The Last Six Months. Look for signs that the company is doing great in general or else not so well — they don’t have to be major headlines; little sidebars will do. If the shares are on a steady upward or downward trend, it might be a good idea to learn the reason behind it.
3. How the Competition is Doing. If the general trend of the stock you’re watching more or less follows those of others in its industry, then the company is probably just following a broad market or sector effect. It’s when your stock is trending in a completely different manner that you ought to take a closer look, and a minute or two to think about whether you should keep it.
Four More For Watchers
For investors who prefer getting a bit more technical when it comes to watching trends, Investopedia discusses four ways to predict the future of the market, by basing it (or not) on the past:
1. Momentum. Very simply, tracking market momentum means assuming that the market will continue moving in the direction it is moving now. The validity of this assumption has been seen in mutual funds, where inflows to the funds match market returns — when more people invest, the market goes up, which encourages even more people to invest.
Does momentum apply to individual stocks, too? A study in the early 90’s seemed to suggest so, although that study only predicted what would happen one month into the future.
2. Mean Reversion. Seasoned investors who have weathered countless market storms tend to think the market evens out over time, anyway. These investors are the ones who shun historically high prices, and buy when share prices are historically low.
Mean reversion is the tendency of a stock price and other market variables to come up with average value after an extended period of time.
Though this tendency has been observed in exchange rates, interest rates, gross domestic product (GDP) and unemployment, research has yet to determine whether mean reversion applies definitively to stock prices.
3. Martingales. Maths majors will tell you that a martingale is a mathematical series in which the best prediction for the next number, is the current number. A very simple example would be betting SGD10 on a coin toss; heads doubles your money, tails loses it all. Statistically, the best prediction for how much money you will have is SGD10, the amount you started with in the first place. This prediction, SGD10, is a martingale.
Applied to the stock market, returns could be martingales in that the value of a stock option would not be dependent on past prices, nor an estimate of future prices. The only inputs worth looking at would be the current price and the estimated volatility.
If returns really are martingales, the best way to predict a future stock price is to just look at the current price and add a very little on top. This means that instead of looking at past trends, investors would do better to focus on managing the risks that come with their investments.
4. Value Investing. Value investors who buy low priced shares in the hope of eventually reaping the benefits, believe that the market was somehow “inefficient” when it priced their shares. That said, these investors think that given time, the market will come to “adjust” their share prices to correct that underpricing.
Does this really happen? Research seems to suggest so, although it has yet to explain why. Though extensive studies were conducted back in the 60’s, the only real conclusion that could be made was that these underpriced stocks came with higher risk, and that investors demanded to be compensated for it.
Charts and Graphs
No look at stock market trends would be complete without at least mentioning the ever present charts and graphs, which seem to go with stock market analyses like bacon and eggs (or death and taxes).
Do you really need to understand stock charts? Well, it depends on who you are or who you ask. The Simple Dollar says that unless you’re a professional investor or investing as a serious hobby, looking at a graph will probably just give you info-overload. You would do better to watch for major events or news that would affect your reasons for investing in a company.
But for investors who prefer to get really technical, stock charts are the way to go. A graph can show you, in black and white, past market trends to help you figure out how it is going to perform in the future. In a way, using charts and graphs is the most logical or scientific way to predict market performance. While their use isn’t 100% accurate or foolproof, they are still very helpful.
If you want to try your hand at using stock charts, there are several online guides to help you make heads or tails of them, ranging from beginner’s how-to’s to more advanced analyses. What you should know at the get-go is that there are several kinds of charts, each focusing on certain variables such as pricing or time frame. The trick is finding out which chart type works best for you.
Digital Trends for Trend-Watching
Digital means for watching trends likewise seem to be trending — The Conversation has taken note of Google and social media analytics being used to follow stock market trends, as well as make investment decisions.
The Spiking app is one such digital trend that allows you to discover which stock spiking on the mainboard of the Singapore Exchange, is driving the buying and selling activities of more than 8,000 sophisticated investors. Whether you choose to watch market trends or watch for spiking stocks as an indicator, use Spiking to help you plan your own investment activities in a tactical and timely manner.