Interactive Investor

Chart of the Week: stocks are heading lower – what to do?

22nd February 2022 08:37

John Burford from ii contributor

In the face of falling markets, investors are often urged to sit tight, but technical analyst John Burford suggests that they think again about holding on to shares that are losing value.

If as an investor you read the wisdom dispensed by the usual suspects in the mainstream media (MSM): “This is just a correction that will reverse back to new highs. Hold tight. It's never a good time to sell in a correction. Hold your nerve. Stay with your long-term plan. The economy is recovering post-pandemic. Hold, hold, hold!” Then I encourage you to consider the alternative.

Something like that is always offered when stocks falter. It's the Pavlovian response of MSM journalists when shares enter a tricky period. That is because few, if any, have the knowledge of (and the wisdom of applying) a reliable system of market analysis that has proved itself useful over time.

Was that such good advice late last year to investors in Facebook (Meta (NASDAQ:FB)) or Netflix (NASDAQ:NFLX) or Tesla (NASDAQ:TSLA)? For years, they were darlings of the media and investors alike. They were supposed to never go down. Now, Meta is off 50% , Netflix off by 50% and Tesla off by 35%.

Of course, it is possible that these shares will recover in time – but in what time? In your lifetime?

I could cite many more less famous examples of individual shares now in bear trends.

It is often said that hope is not a trading/investing strategy – and many investors simply use it as an excuse to do nothing in the face of falling markets. And that is precisely what we have now.

I would advise any investor/trader to examine their own motivations in holding on to shares that are losing value. Very few of us have the patience (and pain threshold) of seeing 50% or more wiped off shares that have been long held as a serious investment without feeling the urge to cut losses.

But as one wag once said: “If you are going to panic, it's best to panic early.”

I still see articles urging investors to buy this share or that. But if we are entering an extended bear phase, I suggest we should be seeing articles urging us to sell this share or that one. I have yet to see a single one in the MSM.

Of course, the headlines today are dominated by the Ukraine situation. Last week, it was rising consumer and oil prices. And next week it may be the Fed (back again) as Wall Street prepares for the critical March meeting.

It has been my long experience that it is entirely possible to construct a bullish case or an opposite bearish one for any market at any time. Two contradictory analyses for the same market! In fact, that is what makes the market in the first place.

That is why I put little store in 'fundamental 'analysis in forecasting where market prices are headed. You will choose which one to adopt according to what you are already biased towards.

Yes, the macro background picture is vital knowledge and, for example, sudden oil discoveries can greatly affect the share price of the companies involved. But I rely on my technical knowledge primarily to make price forecasts, and here is where we are in the US market:

Past performance is not a guide to future performance.

Remember, this index consists of the 500 highest cap US shares over all sectors. And it is now pointing hard down.

The astonishing two-year post-corona crash rally of 120% has built up an equally astonishing level of bullish enthusiasm for speculation (as opposed to investment). It seems that today, everyone is a day trader and looking for the next Tesla.

One of the key signposts I use to judge the level of risk-on/risk-off (aka bullish sentiment) is bitcoin – that most elusive and ethereal of financial inventions.

Past performance is not a guide to future performance.

I have been tracking it especially since it made the double top in wave 5 last April. Since then, it has collapsed to my lower parallel trend-line, bounced, and is now about to test it again. A break of it at the $34,000 region would help confirm my bear case. It is currently off about 50% from its al-time high (to match the declines is Netflix and Meta, please note).

So now, Tesla and bitcoin are both heading lower – and the general market will follow.

One escape route is to buy an ETF that is short the index to benefit from further declines in shares. One such very liquid share is the Pro Shares Short Dow 30 ETF (not currently available to trade on the ii platform).

John Burford is a freelance contributor and not a direct employee of interactive investor.

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