Sometimes the Best Thing to do is to Do Nothing
Many experts are saying that the stock markets are oversold and is ready to bounce back. I am not in the prediction market and neither do I have conviction of that happening. I prefer to wait and watch for markets to tell me what actions I need to take. And sometimes the best thing to do is to do nothing.
Looking at the 1-year chart of S&P 500:
The all-time-high was reached on Jan 3, 2022, when the index reached 4796.56. Friday it closed 3901.36 which is down -18.66%. The RSI, which is one of the indicators analyzed by technical experts to indicate overbought and oversold conditions, is at 35. That is not exactly at a low which was in Feb 2022 at 23.
The experts could be right. They will definitely be right eventually at some point. But they may not be right for a long time. So, the question is whether one should buy expecting a bounce back and wait for the bounce back. I prefer to wait for the actual bounce back to happen before taking action.
So, how will I know when the stock market has actually reversed? I like to use the simple moving averages. Specifically, the 10-day simple moving average and the 20-day simple moving average.
And I use very simple rules for my entries and exits.
When the 10-day SMA crosses over the 20-day SMA I buy
When the 10-day SMA stays above the 20-day SMA I hold, and
When the 10-day SMA crosses below the 20-day SMA I sell
Repeat above steps
These rules will never get me in the market at the bottom. Neither will it get me out of the market at the top. But there is a high probability that it will let me catch most of the bull markets and avoid the bear markets. That sounds good to me.
The key for the model to work obviously is discipline. I am thankful for having researched to find out a model that works. I just need to make sure I follow it at all times.
Sometimes the best thing to do is to do nothing.