Is it safe to re-enter the markets?

With the markets dripping red over the last month, it’s prudent to ask whether this is the start of a major bear trend or its final exhaustion.

Every major index has taken a beating in the first six months of 2022. The Nasdaq is down 31% since the start of the year, the S&P 500 is down 21% over the same period, and the JSE Top 40 index is down 10%.

For pension funds and long-only investors, these are troubling times. The prospect of US inflation pushing towards 9% (it touched 8.6% in May) and even 10% is now far more realistic than it was just two months ago. The war in Ukraine has nudged global inflation to levels not seen in more than four decades.

“Traders are not particularly concerned whether markets are rising or falling,” says Hardus van Pletsen, CEO of online broking firm QuickTrade. “They are trying to make profits no matter the direction of the market, and at the moment they are heavily weighted on the short side. The inflation news has been terrible and this will eat into corporate profitability, so we may see further downside before the market sees bottom.”

Is this a safe time to re-enter the markets?

“It may not be safe, but the volatility creates opportunities for profit, and that’s what traders love. No market will ever rise in a steady progression. There will always be bumps along the way. The momentum at the moment is very much on the short side, but we are seeing some buyers come back into the market looking for a bear market rally,” says Van Pletsen.

What’s dragging the market down into bear market territory are fears that we are entering a recession, according to CNBC. The Nasdaq hit a new 12-month low this week, mauling tech stocks like Netflix and Tesla by more than 7% in one day.

Some analysts read this as the ‘capitulation stage’ for stocks, as the bears assert dominance, but others, such as Seeking Alpha, see this as the start of a bear market.

Clearly, the bulls have gone into retreat. For those relatively new to the market, this may be the first bear market in their investing lifetimes. A true bear market could play out over a year or two, perhaps even longer, particularly in light of the length of the bull market just ended.

Data from Bespoke Investment Group Investment Group shows that since World War II there have been 14 bear markets on a closing basis and, on average, the S&P 500 has pulled back a median of 30%, with the downturn lasting a median of 359 days.

Says Van Pletsen: “There are opportunities in both bull and bear markets for traders. For those who do their homework, study the markets and position themselves accordingly, this could be the opportunity of a lifetime.”

He adds that the sharp sell-off in prices is starting to attract traders looking for a bear market rally.

Keith Speights of The Motley Fool argues that a downturn in the Nasdaq is unlikely to last long, with a recovery expected in 2023 or even sooner.

“The reality is that today’s stock market is still rife with opportunities. The key is staying nimble and focusing on selected areas of the market that can still perform, even as the broader S&P 500 Index is declining,” says Eric Parnell in Seeking Alpha.

Sectors that are likely to run against the trend are energy, pharma and defence stocks such as Lockheed Martin (LMT) and Northrop Grumman (NOC).

For those seeking insurance against any further inflation shocks, there’s gold.

Trading using CFDs

QuickTrade clients are able to trade the Nasdaq, S&P 500, JSE Top 40 and other indices, as well as gold and individual stocks, using a derivative instrument known as a contract for difference or CFD. This allows the trader to benefit from the price movement in the underlying index or stock, and with leverage of up to 30:1. There is risk in doing this, as any losses or profits are amplified when leverage is applied to a trading position.

Traders should also take care not to commit too much to a single trade, and should assess how much of their capital they are prepared to lose on a single trade.

For new traders, it’s advisable to spend some time getting educated in the markets on how to manage the risks, understand the technical indicators, and build successful habits. QuickTrade has a vast amount of resources available to both new and more experienced traders to help them hone their skills.

QuickTrade a licensed financial services provider and online broker.

Brought to you by QuickTrade.

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Roy Walsh

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