Is It Time To Buy? The Market Is Falling Is This An Opportunity?
The sharemarket has now fallen for four consecutive days with a loss of around 5%
. Perhaps now is the time to take stock of where the market is at and whether this is a healthy sign for a sustainable rise.
Bottomed out
It's true that when sharemarkets fall, it becomes cheaper to buy stocks.
The problem is that if the sharemarket falls even further, wouldn't you have rather bought at an even lower price?
The key is to wait until the market has already bottomed out and to buy once the market has started to rise again.
Pullbacks
Within any upward movement, you still get pullbacks. This is where the market retraces usually between 5-10% before continuing on its merry way.
We saw that at the beginning of October and now we are also seeing it at the end of October 2009 as well. This is a healthy sign.
The big question for traders is whether this is the pause that refreshes or whether this is a deeper retracement.
P/E ratios
One of the reasons for caution is that we have seen a big jump back in P/E ratios and a fall in dividend yields back to more historically normal levels.
P/E ratios, which are a way of valuing the sharemarket, have returned to 'pre-Lehman' levels.
Dividend yields
When the market falls, dividend yield rises. Dividend yield peaked during the financial crisis at 6.9% for the All Ordinaries index.
The dividend yields are now back to a more normal level of 4% for the market.
Fundamental indicators
Fundamentals aren't looking bad for the sharemarket. But the market is no longer looking like the bargain of a lifetime.
Using indicators such as a moving average we can't know if this is a pause or a bigger retracement. This is because an indicator is a lagging indicator.
Conditional orders
For now, it's time to think about stop losses. A stop loss or conditional order allows you to set a price and
if the stock reaches that price, an order to sell the share hits the market. It's a way to put a floor on your losses even if you aren't actually watching the market.
Essentially, conditional order is a tool to help you limit your losses.
And the great thing about Bell Direct's conditional orders are that they're free. You just pay brokerage (from $15) once the order goes through.
As the market moves back up again, remember to move your stop losses upwards as well.
All healthy
All in all, a pullback or retracement is a healthy part of a rising market. While the sharemarket has risen 48% from the low in March 09, it still needs to rise another 46% before we get back to the high that we saw in 2007.
by: Julia Lee
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