For those who have not noticed, we are in a bit of a crisis. The Coronavirus has spread throughout the world shutting down businesses and causing income shock. Furthermore, the stock market has dropped faster than even during the Great Depression. It’s tiring how quickly the markets are changing and investors are getting exhausted. Investors are not selling as much as they previously had. In fact, some people are looking to the exhausted selling model to determine when to buy into the market.
Exhausted Selling Model
If you are using the exhausted selling model to determine when to buy into the market there are three criteria.
- The asset(s) must have recently dropped in price due to high volumes of trades.
- There must be evidence of buying pressure.
- Historic price suggest a climb in value later.
Argument Towards The Exhausted Selling Model
The exhausted selling model is often applied to intense panic selling where investors sell many of their assets at times where the sale does not directly reflect the drop in company value. While companies are losing revenue with a sudden loss of sales it is hard to argue that the revenue decrease is equivalent to a loss of over 20%. Therefore, the first criteria is met.
Buying pressure is simply higher demand for an asset. There was a rally shortly after the crash from the Coronavirus that is most likely a result of the stimulus package the US has approved. However, it is unlikely that the rally is sustainable since, until at least the number of Coronavirus cases peak, but there may not be as sharp of a drop. I would say that the second criteria is met.
As for historical climbs in values, the US stock market is one of the most unquestionable assets. That criteria is met.
Argument Against The Exhausted Selling Model
You probably heard the phrase: “this time it is different.” This “recession,” as in it is yet to be a 40% drop from the recent high nor recede in GDP for two quarters, is different. One of my favorite quotes about this crisis is: “usually people worry about losing their jobs AFTER a recession, not before.” The recent panic sale was more of a response to the Coronavirus outbreak, not to the loss of revenue due to the shutdown of labor. The recent rally may not reflect the loss of revenue from this shutdown.
While buying pressure is present, it is primarily because of an injection of cash into the market, not because of a dissolution of the fear. Only time will dissolve this fear and start the true recovery.
As for the historical rise in value, US markets have severely risen in value. But that was primarily because of globalization backed by the US. With the rise of other global markets, including China and Brazil, it is questionable if the US market will rise with the same strength as before. Furthermore, globalization was incredibly helpful with growing the economy. For numerous reasons, people are seeing the downsides of globalization. There may be new policies that will change how globalization affects the US market as well as others.
There are numerous factors that may affect the direction the market goes. In fact, recessions appear to be the result of the same things, but slightly different circumstances and a different order. Even if the criteria are met, the model may not be followed. Therefore, historical changes in the markets may not reflect what is in hold for the future.
Like all models, the exhausted selling model is only good when it is. Unfortunately, there is no way to accurately determine when to buy into the market. However, history does show one constant, when humans are fickle, so are the markets. Markets may seem to become less volatile when people are…less volatile. I would not trust any single model for determining when to buy into the market. You should instead trust your own instincts to determine when you should buy into the market.