How to benefit from a falling stock market
Dear readers,
Welcome back to the Patellic Newsletter, where we provide technical and sentimental analysis about financial markets. On top of that, we deliver crucial market information that can influence financial markets to be always a step ahead of major market movements.
In this week's newsletter, we share some ideas on how to build long-term wealth when economies go into recession and how to make a falling stock market work in your favor.
Cash
Saving cash is not a bad idea when a country is experiencing economic turmoils. This is because when a country is entering a recession, stocks tend to perform poorly. And when stocks are falling it is really good to have a lot of cash at hand to invest in companies that are trading below their real value.
One thing to look out for is investing too early when stocks are falling, especially when central banks all over the world are hiking interest rates. This makes it harder for companies to borrow money, pay off remaining debt or to expand further.
When the next earnings season is upon us, we expect that companies are reporting reductions in revenue due to weakening consumer spending, inflation and interest rates higher (probably more bad news).
So we believe it is wise to have some cash at hand and exit leveraged positions to give yourself the upper hand when markets are too oversold.
Shorting
A recent trade we entered is shorting the S&P 500. Why? Let us explain:
On a technical analysis standpoint, the S&P 500 index broke through its uptrend from the lows of June. When it broke through our support we entered a short position. The price tried to reach the trendline again (what was now acting as resistance instead of support) but with no prevail and when it fell below the retest’s low, the index plunged.
With the volume range indicator, the bars on the left side in the chart, we can see where there is high or low volume at a specific price. This is different from the normal volume bars below the candlesticks, that only specifies the volume of a candle.
The price of the index is currently entering a low volume range zone, this tells us that the price has no strong support of resistance zones near it. When that happens the price will fluctuate more, so expect more volatility in the market the next week or two.
We expect that the S&P 500 will touch the 2020 highs in the comings months. That is also our profit target because there is where the price is starting to have more volume again, which tells us that price support is stronger there.
Accumulate
Slowly adding stocks when the stock market is falling is a really good strategy to grow your investment portfolio and build wealth over the long-term. This is the safest and best investment strategy there is, especially in bear markets.
What we mean by this is that for every monthly paycheck you receive, you're investing (approximately) 5-10% of it in index funds or individual stocks that you've researched. When you do this in a bear market, you will have great stock positions going forward when economies do much better, reflecting a better stock market, and therefore your portfolio.
However invest only in stocks who can survive through big recessions.
What we are doing
We are now shorting, holding cash on the sidelines and are waiting for the right moment to start our accumulating process. We believe that we are not near the bottom yet and that there is more financial market pain ahead in the coming months.
Good luck with your investment strategy!
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