As a consulting and market research firm that provides insights to a wide variety of institutional investors in the financial space, we thought it would be helpful to touch on the bottoming process of stocks, especially as it relates to navigating the market in the most informed, intelligent way.
One thing to think about first: Market bottoms are not based on an isolated point in time, but rather are market processes that form over time, and market bottoms can differ greatly in their overall pattern of price action as the bottoming process propagates and eventually culminates. For example after striking market bottom, prices can subsequently move lower, consolidate or move higher.
Secondly, implementing a rule-based customized approach to identifying the bottoming process based on triggering well-specified investment criteria is worth its weight in gold (or much more). And in working together we can help you identify what matters most based on your particular objectives by capturing first principles of market function, removing human emotion from the investment process, and operationalizing the rules in order to navigate the bottoming process for ultimately initiating and building investment positions at opportune times.
Our research over many years has identified several market bottom patterns and the different potential market price outcomes that commence as the bottoming process eventually culminates. And we thought it would be helpful to share our insights related to 3 scenarios:
When prices continue to move lower after striking bottom, we continue to build our position over time at opportune price levels as our well specified investment criteria are repeatedly triggered as the bottoming process propagates. We welcome lower prices for the best quality enterprises as we build positions over time until we reach our preset maximum position or the bottoming process culminates. The most favorable scenario.
When prices begin consolidation/range bound after striking bottom, we understand once this consolidation culminates, there is a potential for even lower prices, and we wait for our well-specified investment criteria to be triggered again at potentially more favorable prices. Prices can consolidate for extended periods of time after striking market bottom. Prices may also move higher after periods of extended consolidation.
When prices move higher after striking bottom, we take a neutral stance until the price returns lower to an opportune entry point that triggers our well specified investment criteria. Prices often do move lower after the initial bounce higher after striking bottom. In cases where we have truly nailed a terminal market bottom, while favorable, the tradeoff may well be that we have only been able to build a small position in the enterprise before the commencement of subsequently higher prices.
At The Practical Contrarian, we specialize in identifying opportune entry points as the bottoming process propagates for securities of various asset classes. And if you’re managing a hedge fund, family office or other financial institution and looking for an outside perspective to guide you in the future let’s connect.