Don't fall off the bull before the buzzer sounds

Have you ever watched Professional Bull Riding (PBR) on OLN Cable TV? Men from every race, weight and height mount these terrifying animals called Bulls, bred by the top 'stock contractors' in the world. These bulls are given names like 'Hammer,' 'Jack Daniels Happy Hour' and 'Little Yellow Jacket.' What odd names for such strong creatures. A gentlemen mounts the bull in the gate; places one of his wrists on the back of the bull's neck, tightly secures it with a well plaited rope, adjusts his hat and signals to the bull fighter to open the gate. The gate is opened, the crowd roars and the rider rides that bull like there is no tomorrow hoping not to fall off until the buzzer sounds after eight seconds indicating the end of the ride. A ride is scored out of 100 points half for the bull and the other half for the rider. To gain high marks, the bull's performance must be strong and speedy with rolls and kicks. The rider must remain in control with good body position, staying on the bull for the full eight seconds in order to maximize his score.

A bull stock market works similar to that of a PBR competition. It feeds on investor confidence and a general feeling of optimism. Prices rise forming a long-term upward trend with anticipation of further investment gains. In this type of market, company news, as it relates to earnings, new projects etc, have a propensity to exceed investor's expectations. Stocks break through their 52 week highs on a consistent basis. In theory, the system becomes liquid, interest rates decline and the stock market provides a higher return than cash. Investors, those savvy or sophisticated enough to recognize the trend, move cash away from the banks and marketable investments and invest in the stock market. This movement of assets from the banking system into the market causes an increase in demand for stocks, in other words, many buyers are willing to purchase but there are few sellers. Key economic indicators allude to an oncoming recovery and the economic environment has a general feeling of hopeful anticipation.

The bull exits the gate robustly and the rider's adrenalin and vigilance becomes intense, anticipating the bull's movement. At least three seconds into the ride his emotion peaks, he feels he has complete control over this strong-willed animal. Investors experience the same feeling as the bull rider. On the international circuit, i.e. the U.S. stock market, the investor calls his broker to get a feel of the market and places a bid (order to buy) at or above the current market price in an attempt to either take any available shares out of the market or out-bid his competition in an attempt to purchase a 'hot stock.' His reasons for purchase are simply price appreciation and dividend income. He has considered all of the 'news' and all of the 'rumours,' which are already considered in the stock price. In his sight are past volumes and prices along with dividend yields of each tempting stock. His eyes widens, heart races and he can almost see the floodlight at the end of the tunnel. Greed sets in six seconds into the ride. He not only thinks he can ride the bull for the complete eight seconds, he thinks he can go beyond the rules and take this beast outside the set limits hoping for increased capital gains. He takes on additional risk with a vision of reward.

In a bull market an investor should take advantage of rising prices by buying early when the upward trend first forms and sell when the price of the stock reaches its peak. This is more easily said than done as determining exactly when you are at the support or resistance of a stock is near impossible. Investors are inclined to believe, once a trend is formed, that the market will continue to rise. With this belief the savvy investor can invest in stocks with a high possibility of making an attractive return.

Yet, eventually his thinking can become irrational as the bull becomes weary. His ride loses its lustre and the crowd abandons their support for the bull and the rider.

On the other hand, in a Bear market the economy decelerates, unemployment rises; share prices continually close down forming a downward trend that investors believe will continue in the long run. This is the complete opposite to the Bull market. There is elevated supply and a minimal demand for stocks and the general feeling by investors is not one of anticipation but rather that of pessimism. Bear markets increase the probability that an investor will lose money because the bottom of the decline is obscured by a continual downward spiral. The rider becomes disappointed in his actions. Questioning his decision to hold his stocks for maximized profits only to be reminded of that still voice and gut feeling to free himself at the sound of the buzzer while he still had the crowd and the bull's buck was weakening. The bull himself is not content to let the rider off easily. He makes sure that the bullfighters around him (unemployment, inflation and interest rates etc.) see him coming at them before he exits the stage. Some riders jump off the bull at the buzzer and are rewarded for their timing and risk taking, while others are wounded either physically or emotionally with considerable losses on their investment.

In the Bahamian Stock market, most investors tend to have a buy and hold strategy. Which means our market is not liquid enough to accurately predict these trends based solely on market actions. Few people sell their stock with intentions to maximize capital gains. Most sellers list their shares on the market to pay for school fees, legal fees, home improvement, and real estate, while mutual fund managers liquidate holdings to facilitate redemption requests. This is not a sellers market at its peak or trough. It is a buyers market redefined. Money controls the market and those buying hold the money. High net worth individuals and pension funds determine market action. Fundamentals drive their decisions to buy, sell or hold. Once they have exhausted their allocations and satisfied their once insatiable desire for particular stocks, they pull back their resources and move the funds into other investments (real estate, fix deposit, bonds).

The stock market is a two-faced animal. One of its faces resembles a bull and the other a bear. Almost sounds a bit like the 'day of reckoning' but to market participants it can be the best of times, the worst of times or, to the extreme, the end of all times for those who timed the market wrong.

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© 2006 The Freeport News