No down days can make us overconfident

June 20, 2024 3 min read

Our behavior plays a huge role in how we see the markets. If we see the same market trend every day, it becomes a habit. Doing the same process repeatedly makes us think that nothing else is possible. When we are in a bull market like we are now, and we haven’t seen many down days since March 2020, we tend to forget that there can be a bear market. Newer traders, especially, might not be prepared for a time when stocks don’t make returns.

Looking at the U.S. markets, we can see a pattern. From September 2016 onwards, there were 351 days without a 2% down day. That is more than a year and a quarter. After that period, there were more frequent down days, but still not very often. Since March 2023, the market has not seen a 2% down day in 322 sessions. This means over a year has passed without a significant market drop. This can create a false sense of security among traders.

Source : Ritholdz

This lack of significant down days is risky. When the market finally has a down day, it could be very sharp. Many traders, especially those using leverage, might not be prepared. They might believe that a 2% drop is the worst that can happen because that is what they have seen recently. This recency bias can lead to a very severe reaction when the market finally does drop more than 2%.

Comparison with the Indian Market

In India, we have seen some sharp market moves. On election day, there was a market drop of seven to eight percent. This kind of fall has not been seen in small caps or mid caps recently. When it does happen, it could be significant. However, in comparison to the U.S., the Indian market might be better prepared. The Indian market has already seen some of the hot money and speculative investments get purged.

Preparing for Market Changes

Traders and investors should always be prepared for market changes. The current trends in the U.S. market show that a sharp down day could come at any time. It is important not to get too comfortable with the current market conditions. A well-prepared strategy will help manage risks when the market does turn. Regularly reviewing and adjusting strategies based on broader historical data rather than just recent trends can help in staying prepared.

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    No down days can make us overconfident