Trusting the Rally

Trusting the Rally - Trusting the Rally Brett N....

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Trusting the Rally Brett N. Steenbarger, Ph.D. www.brettsteenbarger.com This is a draft of an article that appeared on the MSN Money website ( www.moneycentral.com ) in October, 2002. It was Thursday, October 10 th and the S&P 500 Index was rallying off a morning low that had dipped below its July bottom. As the market roared into positive territory, I commented to a friend, “This rally looks for real.” His response took me a bit by surprise given the seeming market vigor. “No way,” he declared. “I’m not getting in. I don’t trust this market.” In retrospect his response made sense. Since the peak in the S&P 500 Index, we have had a decline that has cut the average nearly in half: from 1527.51 on March 24, 2000 to 768.63 as of October 10, 2002. As Table One indicates, during that period we have had five rallies of 10% or more in the S&P, including the recent bounce off the Thursday low. Four of those five rallies ultimately gave way to significantly lower prices. Beneath my friend’s response is an important question: What is to say that this is the rally that can be trusted? In this article, I will take a look at historic market bottoms and attempt to draw a profile of bottoming processes. The goal of this profiling is to discover objective criteria that can inform investment decisions that are colored neither by the greed of bottom fishing nor the fear of market weakness. As we shall see, the profile that will emerge
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may prove most useful in determining whether we are witnessing the beginning of a new bull market or just another load of bull courtesy of the bears. Date of Rally Start Date of Rally End During the Rally 4/14/00 1339.40 9/1/00 1530.09 14.30% 3/22/01 1081.19 5/22/01 1315.93 21.71% 9/21/01 944.75 1/7/02 1176.97 24.58% 7/24/02 775.68 8/22/02 965 24.41% 10/9/02 768.63 As of 10/15/02 881.27 14.65% Table One – Rallies in the S&P 500 Cash Index During the Market Decline from 3/00 to 10/02 A Psychological Perspective on Profiling Creating a market profile to build trust in investment is akin to a strategy I employ with clients who have been burned in romantic relationships. Very often the hurt party
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has experienced a series of disappointments in one or more relationships in which trust was betrayed. This makes it difficult to contemplate entering new relationships. “I just don’t trust men!” is a common refrain among many women I have counseled following a marital infidelity. This, of course, creates an emotional Catch 22. It is impossible to regain trust in relationships without experiencing trustworthiness, and it is impossible to re-enter a relationship until a measure of trust has been regained. The dilemma of the investor is similar. Successful experience is needed to regain confidence in the market, and yet the investor cannot achieve such an experience staying on the sidelines! The profile I create with my clients helps address this quandary.
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This note was uploaded on 10/21/2010 for the course BUSINESS 19450 taught by Professor Goldberg during the Fall '10 term at Saddleback.

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Trusting the Rally - Trusting the Rally Brett N....

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