Perceptual mapping is the key to successful stock investing

September 07, 2023 (MLN): The article questions the rationale behind institutional investors’ late selling of stocks in an extended bear market.

We’ve seen late selling of stocks in an extended bear market by institutional investors in the past and we may see that in the future as well.

The question is not why institutional investors sell stocks in a bear market, but rather why they resort to late selling when they could have started at the beginning of the down cycle.

It raises the question of what compels institutional investors to hold on so long when the market is gradually slipping into endurance. Is it the hope for an early market recovery or the fear of missing out on a bull market that is usually followed by a bear market? Regardless of the reasons, selling stocks by institutional investors during stressful times always takes the market by surprise.

In an effort to visualize the rationale behind the delayed selling of stocks by institutional investors in a prolonged bear market in the context of economic and stock market cycles, the author came across the notes of Mr. John Calverley, Chief Strategist of American Bank and Chairman of American Bank’s Board of Directors. Business Economists Association.

He wrote in his book “The Investor’s Guide to Economic Fundamentals” that;

“The stock market follows economic cycles; However, the big rally often happens in the middle of a recession or early in a recovery when markets are suddenly expecting a rally. Similarly, deflation often occurs when valuations are overvalued, markets suddenly anticipate an economic slowdown or become alarmed by a political shock.

Mr. John Calverley’s remarks are in no way different from what the conventional axiom suggests; That stock markets thrive during economic expansion and fall during economic contraction, with the only exception being the phases of the economic cycle, anticipating the up/down shift in the economy, and the extension of valuation as a coincidental factor of the stock rising or falling market cycle rather than being a driving factor.

The charts shown below sufficiently confirm that our stock market responds to the above factors the way markets around the world respond in a similar situation, and thus supports Mr. John Calverley’s claim to the letter.

The year 2023 happens to be a period of great economic uncertainty for Pakistan. It is marred by fear of external debt default, high inflation, higher interest rates, unprecedented weakness of the Pakistani rupee against the US dollar, and slowing economic growth. Together, they cast a bleak picture for the economy during the first half of the fiscal year, caused the benchmark to crawl to =42,000=, and forced it to stay there for a long time. However, once the fear of default disappeared with the signing of the $3 billion Standby Credit Agreement with the International Monetary Fund, the stock market experienced a sharp recovery and ended up with a streak of =9000= pips within a few days with a technical correction in between. Achieving economic benefits that have not yet been realized.

Nothing, but changes in the economy pushed the market to a peak at =49,000 levels.

Likewise, the stock market fell once hope for an economic recovery waned. There was no gap between the timing of the decline and the caretaker Finance Minister’s reports on the deteriorating state of the economy, while acknowledging the absence of any financial space to maneuver the economy out of the crisis.

The last part of Mr. John Calverley’s allegation was also confirmed by him;

“A market downturn often occurs when valuations are up, and markets are suddenly anticipating an economic slowdown or are alarmed by a political shock.”

It is naïve to think of the ignorance or inability of institutional investors to conjure up the relationship between the economic cycle and the stock market cycle when they have the privilege of knowing, skills and technology to assess market direction early on.

So, rather than finding a rationale for the late selling of stocks in an extended bear market by institutional investors, accepting environmental politics as an indicator of stock market common mishaps and mapping the same environmental political ramifications on stock market performance would be a more sensible initiative.

Invoking such a perceptual paradigm will be a reality once institutional investors, capital market custodians, and academics join forces on the cause.

Perhaps one aspect that we as investors lack is why Top Line Security has adopted “Stay Ahead of Curve” as its business motto.

Copyright Metis Link News

Posted on: 2023-09-07T11:40:23+05:00