A bear market is characterized by a prolonged downtrend in the stock market. The rule of thumb for entering a bear market is when the major market indices, such as the DAX or S&P 500, fall by 20 percent or more compared to the last high.
But how do investors know when a bear market is over?
Investors should pay attention to this key signal
As Investor’s Business Daily reports, the key signal investors need to look for to tell if the market bottom has already been reached is the follow-through day. The concept was developed by Investor’s Business Daily (IBD) founder William O’Neil, who also developed the CANSLIM method. The follow-through day takes place just after the market has bottomed and is intended to confirm that a new uptrend has begun.
According to the IBD, to spot the follow-through day, investors should look for an attempted rally during a downturn or market correction. The first day of an attempted rally begins when a major index closes higher than the previous session – regardless of volume or the magnitude of the gain. It is only important that the attempted rally continues. The index should not undercut the low of its first day.
In the course of the still intact rally attempt, the NASDAQ or the S&P 500 must then record a sharp increase in volume compared to the previous day on the fourth day or later. This surge in volume marks the follow-through day that confirms a new uptrend.
Not every follow-through day is followed by a recovery
According to Investor’s Business Daily, the follow-through day is a sign for investors to get back into the market – but slowly and not all at once, because not all follow-through days actually led to a sustained recovery. For example, if the index breaks below its bottom, the signal is considered failed and investors should be on the lookout for a new rally attempt. Conversely, if the uptrend continues and growth stocks gain momentum, investors could start investing more aggressively in equities.
It’s also good to know that while not all follow-through days result in a sustained new uptrend, a bull market has never started without a follow-through day, as IBD reports. So, instead of relying on any more or less likely forecasts, investors could wait for this signal and, in the best-case scenario, take the best possible entry opportunity close to the bottom and benefit from a subsequent recovery.
Editorial office finanzen.net
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