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How I’m using today’s heads-up from the stock market

Kevin Godbold
Screen of price moves in the FTSE 100

Some of the largest gains in the stock market this morning feature in my watch list of ‘trash’ shares.

I made the list because during the bear market following the credit crunch 13 years ago, at one point there was a so-called ‘dash for trash.’ And it could be happening again!

Share prices on the floor

Think of those highly cyclical enterprises, or firms with big debt loads, that have been so comprehensively pummelled and nailed into the floor in this and previous bear markets. Sectors such as housebuilding, airlines, distributors and banks feature strongly.

And big rises are all over my screen today from names such as Barclays, Barratt Developments, Dart, Vistry, Ferguson, Whitbread and Wizz Air. Indeed, there’s some optimism in the air about the coronavirus pandemic because the daily figures appear to be flattening. It seems that the stock market is looking ahead to the gradual resumption of normal economic activity.

If the market is right and the crisis abates sooner perhaps than expected, it makes sense that companies such as those I’ve mentioned could experience brisk recoveries in their operations. And if that happens, the shares could have been marked down too far. So now the market is correcting its error.

But it’s hard to see moves like this coming. And that’s why investors such as Warren Buffett, or David Dreman and other value players urge us to ignore the ‘fear’ in the markets and to buy shares when pessimism about the outlook is high. We can see the theory in action now. Pessimism has eased back a bit and look what’s happening to these share prices – they are shooting up!

How I’d proceed now

Is it too late to buy these stocks now? I don’t think so. But I wouldn’t chase them upwards today. The great thing about the stock market is that it’s good at offering investors second, third, fourth and more chances. Today is an ‘up day’, but it’s normal for all shares to stair-step through an uptrend.

Indeed, it’s rare for shares to shoot higher without periodically consolidating. In other words, every so often, the share price will fall back a little then perhaps move up and down a bit for a couple of days or so before taking off again. And such periods of consolidation could provide a good entry point if you identify a stock you’d like to own.

The market has done us a favour over the past few days by showing us which share prices are likely to move higher when the crisis shows solid signs of coming to an end. I’d use that intelligence now to focus even harder on my watch list. If you can justify owning some of today’s risers on the grounds of compelling fundamental analysis, today’s heads-up from the market will be useful to you.

The markets could go anywhere from here and the crisis could have further depths to plumb. But if you work your watch list and buy on dips and down days, you can keep in control of your investing rather than panic-buying just because shares are going up!

The post How I’m using today’s heads-up from the stock market appeared first on The Motley Fool UK.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Barclays and Wizz Air Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020