Market: “Cash is king”, “do not catch a falling knife” … These very colorful stock market injunctions

(BFM Bourse) – The Bourse is full of more or less famous instructions in English. BFM Bourse offers you a non-exhaustive overview.

The stock market has its own jargon very animalistic as well as sayings, not always to be respected, as we explained in previous articles.

This world is also accustomed to injunctions or advice in English, of which we offer a small non-exhaustive anthology. And that we will obviously translate.

Buy the rumour, sell the news

This very popular expression refers to the fact that while the market traditionally reacts to rumours, investors tend to then take their profits once the information has been confirmed. Thus the absence of surprise in relation to expectations tends to disappoint. the Renault Capital Market Day (investor day) recently illustrated it. The group delivered ambitious objectives, but the content of this meeting did not really create a big surprise, which resulted in a decline in the action.

“Market prices tend to move in anticipation of an event – ​​the rumor mill. By the time the event occurs, most people who want to own the stock or currency have already priced it in,” explains broker CMC Markets. “This means that when the event occurs, there is no one left to buy and continue to drive the price up. This leads people to sell, trying to cash in their profits,” he said.

Buy the dip

This injunction simply advises to position oneself for the purchase when the asset has reached a low, having of course documented enough to be convinced of the potential of the rebound. Which is obviously never easy to determine – see the following expression on this subject.

It is nevertheless true that an exemplary stock market performance is often accompanied by moments of withdrawal. This can then lead financial analysts who are optimistic about the medium and long term potential to advise using these declines as an interesting entry point for the value in question.

Never catch a falling knife

This time, it is precisely a question of avoiding buying a security or an asset that keeps plunging, thinking that it has reached the bottom of the pool. The image of the knife shows that by trying to position themselves on the title, and therefore to seize the knife in flight, the investor has every chance of cutting themselves.

“The trick is knowing where the floor is. In the kitchen, when a knife falls, it’s obvious. In the stock market, it’s harder,” explains asset manager DWS.

“So it’s hard to find the right time to strike. Sometimes the problems of companies with plummeting stocks are more persistent than expected. If a stock market crash started because a company wasn’t innovating, it can be a long time before it regains its former strength – if it ever does,” the company warns. DWS gives as an example “the mobile provider that missed the opportunity to enter the smartphone sectors”, which seems to refer to the Finnish nokia.

Sell ​​in may and go away

This is the famous counterpart of the “Halloween effect”. In other words, as we explained in a previous article, the belief is that it is advisable to abstain from the stock market from May 1st before reinvesting from the eve of November 1st and therefore Halloween day. If a seasonal effect corresponding to this injunction actually tends to be observed, researchers have never really managed to explain it…

Don’t fight the Fed

This old Wall Street mantra dates back to 1970 when a famous investor and forecaster Marty Zweig explained that the correlation between the direction of the market and the monetary policy of the American Federal Reserve (Fed) was important. This expression was contained in his book Winning on Wall Street.

In other words, you should never make investment decisions that would go against the policy of the monetary institution, at the risk of being engulfed by the wave. This notably means making more cautious choices and abandoning risky assets when the Fed hardens its bias.

“For most of the last few decades, ‘not fighting the Fed’ meant a mode of risk-taking. Investors were rewarded for keeping their foot on the accelerator, as central bank liquidity reduced volatility. […]these easy financial conditions have been instrumental in creating the longest and strongest bull market in history,” explained in August Blackstone Private Wealth Solutions. “But all that has changed now, and investors need to consider their positioning accordingly,” added the financial intermediary.

Cash is king (“Cash is king”)

This maxim amounts to saying that the important thing for an investor remains above all to focus on the generation of cash (the “cash” in question). Equity valuation models are largely based on the discounted cash flow method, hence the focus on cash. In practice, cash generation remains the main indicator monitored by the market for manufacturers with very capital-intensive businesses, such as Airbus Where Alstom. This is less true for luxury where attention tends to focus on organic growth.

At a time when interest rates are rising, monitoring cash is nevertheless essential at the moment. It is also important for investors to have it when many financial products disappoint.

Julien Marion – ©2022 BFM Bourse

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