The United States stock market’s strong close last week poses a dilemma for investors – is the bottom already in place, or will we see a new attempt at the lows?
Long-term investors are different from speculators in the sense that they tend to add on market dips. Naturally, the definition of a market dip is the one that makes the difference.
For some, a decline in percentages from the top is enough to deploy new capital into certain stocks. The more the market dips, the more investors buy.
There is one thing, however, that both speculators and investors fear – the possibility of missing the action.
FOMO Dictates the Price Action
FOMO or the Fear Of Missing Out is said to be responsible for most of the market’s recent bull run. At the start of the coronavirus crisis, the decline in the stock market was so steep that many voices called for the market’s complete shutdown.
In fact, on a few occasions, the market activated the circuit breakers. This is a defensive mechanism in place for decades, destined to protect investors from unsustainable market behavior. A drop bigger than 7%, 13%, and 20% triggers market halt – trading takes a break, as the market is limited. This is known as a “limit down”
The drop was so fast that it set the record as the sharpest market decline in history. Yet, it bounced from the lows already 31%, and FOMO indicates the pressure remains to the upside.
While many focus on the broken indicators and misleading data coming out as a result of the coronavirus pandemic, Traders are buying. Be it institutional investors, high net worth individuals, or sovereign wealth funds.
It is said that a drop or rise of more than 20% from the top/bottom makes the difference between bullish and bearish markets. Using this metric, the current 31% rise far exceeds that threshold, indicating not only are we in a bullish market, but in a market that continues to rise.
Throughout history, investors betting on doom and gloom did not do well in the stock market. Optimism, in the end, prevailed.
As the stock market is a leading economic indicator, it suggests investors’ risk appetite still has elevated levels.