HOW TO PROFIT FROM A BEAR MARKET

When a stock market correction is prolonged, it becomes a bearish or down market as prices continues to nose-dive. In this type of situation, many sto...
When a stock market correction is prolonged, it becomes a bearish or down market as prices continues to nose-dive. In this type of situation, many stocks hit their lower lows while some remain in a range as they oscillate within a set price, waiting for external forces to impact it positively or otherwise.
Whenever the market is in a bearish mood many investors and traders panic and sell even at a loss to cut their loss, while staying away from the market without really sitting down to analyse the factors behind the particular state of the market.
I have since discovered, while reviewing the responses of different classes of investors within this period led me to the conclusion that most of them and even some market players lack the understanding of market dynamics. This is because in the real sense of it, hopelessness and panic are products of the unknown which suggest that most people either did not take time off to analyse the situation that led to the fall or did, but got the strategy wrong.
Hence, there is need to briefly comment on the kinds of bear markets and how to ride with them, which are factors that cannot be overemphasized today, just as always.
Causes and Effects of Bear Market
There is what is called a ‘fundamentally-induced’ bear market. It means that the bearishness of the market is traceable to events that have general negative influences on the entire financial or even economic ecosystem within which the market operates. For example, account has to be taken of the global financial crises, as well as country specific political unrests, bad governance, wars or attacks, sanctions against a country by foreign bodies, natural disasters, epidemics and the like.
You will discover that these events are such that could adversely affect the confidence level and reduce the earnings power and capacity of the generality of the population. In many nations, you will agree with me that such events have led to migration and capital flight. This is so because businesses and investments operate best in times of peace. In effect, the fundamentals of listed companies in a country at war will be affected. In other words, there would be low capacity utilisation and consequently, poor earnings reports and, of course, declining share prices.
When you sight a down market brought about by the kinds of occurrences mentioned above, please note that it would take a while for such to ease and if you do panic, it is justified. Under such circumstance, it may be wise to sell off your positions early and hold cash while you study the market.
A system-induced bear market is associated with negative situations arising from changes in the system or style of managing the financial market; or it could be caused by the stock market itself, the government or the regulators.
This could first affect an industry and later spread to the general market. It may also affect the general market at the same time, depending on the kind of changes and their sources. You saw the impact of policy change such as the government’s implementation of the Treasury Single Account (TSA) that moved trillions of Naira in public sector deposits from the vaults of Nigerian banks in 2015. More recently, there was the impact of the economic recession that started in 2016 Q1, before heightening by end of last year, and how it played out on the nation’s economy and financial system. There was also the attendant currency crisis that resulted in the devaluation of the Naira by as much as 60%, reflecting in the stock market for months. This obviously caused panic in the system, though short-lived.
Again, for now, Nigeria is enjoying relative peace. Regardless of the insecurity in the country’s north east, its economic fundamentals are intact. Recall also that the falling price of oil at the international market put enormous pressure on Nigeria’s budget, external reserve and the exchange rate, even as foreign portfolio investors sold their positions ahead of the general election of 2015. The Asset Management Corporation (AMCON) of Nigeria also sold assets under its control to raise a significant N1tr, which further piled serious pressure on the stock market.
A system-induced bear market is a buy opportunity. To benefit from this bear market and correction, it is advised that you target stocks with the following characteristics:
1. Buy stocks with high dividend yield
2. Buy stocks that are down due to the general downward market
3. Buy stocks that have always been defensive in previous down markets and still have strong fundamentals
4. Chart markets and stocks regularly to know the resistance and support
5, Buy high quality dividend stocks with strong earnings and high payout.