Pullbacks during a bull market are the perfect time to jump into a name and ride it higher. But pullbacks when the wall of worry is up are different. Fear enters the picture.
Just look at the recent moves higher in market volatility. Investors and traders started to doubt this year’s nice bull run. After all, when we’re in a bullish trend, nobody expects a bout of volatility.
Volatility can be caused by several factors, but the main culprit is usually a fear of losing. (Volatility is simply an expansion of the market range. It’s not a bearish signal.)
When markets pull back during a normal boom/bust cycle, the natural instinct is to make sure you’re only “in” during the up moves. During down moves, you want to be holding cash – or at least have smaller trades working. This strategy is impossible to follow. No one has the skill to time the markets just right – not even Warren Buffett.
How to handle pullbacks
Let’s rethink our mindset. Focus on your goals and do not pay attention to the noise.
Remember that your trading targets are often short- to medium-term. Your investing targets are long-term; it’ll be years before you cash in.
Short-term markets move back and forth like a windshield wiper. They never tell you when it is time to make a move.
When markets pullback and the wall of worry is up, you must rely on your experience and analysis. Your knowledge will tell you when to step in and buy. This is not easy to do! When the market is down and REAL selling happens, being a contrarian and buying on a pullback can make you look foolish.
Examine the pullbacks in front of you. Why is it happening? Have stocks fallen in value enough that they are hitting your “buy” thresholds? If it makes sense for your overall trading strategy, take advantage of the wall of worry to grow your wealth.
