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Day 11 - A "Dead Cat Bounce" or Recovery On The Way?

The market rebounded quite radically these past weeks.

Source: Yahoo Finance Chart

It seems like we have rebounded quite nicely from the low.


However, China just reported today that her GDP had dropped by 6.8%. The first decline since 30 years ago!


You can read more here.


How is this possible?

Shouldn't the market drop further given the second-largest economy posted a decline and likely that the rest of the world will be in similar paths?


According to my friend, Ser Jing, who had written a very good post,


Over the next few months – and maybe even over the next year – It’s very, very likely that the economic data that are going to be released by countries around the world will look horrendous. But individual stocks could potentially reach a bottom way before the deterioration of economic conditions stops. If you miss that, it could hurt your portfolio’s long run return since you would miss a significant chunk of the rebound if you came in late.

He has also shared some interesting facts on his post.


Did we miss the chance to invest?

In my opinion, it's never too late. As long as we dollar cost average into the market, we should do just fine.


What happens if the market drops further?

Well, there will always be this possibility.


I see it this way. If the market keeps going up without dropping, then I don't think anyone will ever need to work. Just throw in whatever life savings that one may have and he or she can just live off the investments.


Investments come with risks and we need to be ready for any potential losses. Most who aren't ready to lose money will fall prey to emotions. It is also these folks that will tend to sell when the market is rising and buy when the market is falling.


Mr Market Pet Peeves...

Market prices work in mysterious ways. Often times, it is only through hindsight that we can connect the dots and identify the reasons behind it.

The GDP can go down, but the market can sometimes be heading up. In such situations, we will think that the market is forward pricing.

On a similar context when the GDP goes down, the market also goes down. We usually attribute the drop due to the poor economy.


TL; DR

Rather than providing an explanation of the correlation between the economy and market prices, I realised that it's easier to identify opportunities from an individual company or trend perspective.


This way, we can take the guesswork out of investing. Emotions like greed and fear can be more easily managed too.

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