You’ve probably heard the phrase “This is a trader’s market!” so many times that you’re sick of hearing it.

If you’re an investor, the concept trader’s market probably doesn’t mean that much to you since you’re buying stocks for the long haul by dollar cost averaging into the market.

But, that doesn’t mean you should remain oblivious to what the charts are telling you!   You may even find a way to use a trader’s market to your advantage.  Whether that be making a few bucks from it, or keeping it from hurting your future returns.

For example, near the end of the Great Depression, the Dow Jones Industrial Average experienced massive volatility swings ranging from as small as 10%, but as substantial as 60% in as little as a six month time span.

Such quick movements are common in bear market rallies where buyers (and active traders) rush into the market under the auspices of value investing.  However, many short term rallies are created because the fear of missing out on cheap stocks and buyers will rush in once they think a bottom has been put in place.  Problem is, when more bad economic news is released, traders will quickly dump their positions, those quick gains will be erased, and they will wait for another buying opportunity.

What can you learn from the Trader’s Market chart?

1. Be suspicious of quick rallies.  When the market runs up 20% to 40% in just 3 months, ask yourself what has changed?  Did anything occur in the economy to justify a substantial price increase in so little time?
2. Buying because everyone else is buying.  Are you feeling pressure to buy just because everyone else is buying and you don’t want to get left behind?  Making long term investments because of peer pressure isn’t exactly what finance professionals would call a good decision.  Be patient, and wait for economic news that matters.  Like historic lows in S&P 500 earnings.
3. Bad news will move the market quickly.  During a prolonged period of bad economic news, there will be bright spots — or green shoots — that hope to instill confidence in the market.   Times like these are when a more pragmatic view of the world will help an investor weed out the good news from the head fakes or overhyped breaking news.
4. Buy on the dips.  As chart above shows, buying stocks when no one seems to want to own them appears to be the best time to buy.   It is a counter intuitive argument since no one wants to go down with a sinking ship, but slowly accumulating shares by dollar cost averaging during a period of negativity beats buying at the short term trading tops any day.

Does the chart tell you anything different?  Do you even buy into the concept of a trader’s market?  Or do you consider it just another fallacy by overly aggressive traders?

Image credit:   Barrons – Be Wary of Green Shoots

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