Bottom - Fishing in US Stocks

When investing in US stocks, the most crucial thing is bottom - fishing.

Looking at the market in the past 20 years, the most important investment rule is to buy on every dip. So, for the money already invested, simply hold it. The key is when to bottom - fish with new money. In US stock investment, bottom - fishing is both the easiest and the most difficult thing. 

It's easy because bottom - fishing in US stocks follows the principle of "buy a little on small dips, buy more on big dips, and don't buy without dips". It's difficult because most people have experienced "bottom - fishing halfway up the slope" and have "bottom - fishing PTSD syndrome". They always want to buy at an even lower price for more safety. As a result, they dare not bottom - fish when the price is dropping and chase after it rebounds. 

So, when the opportunity for bottom - fishing in US stocks arises, we must figure out two questions:

1. Under normal circumstances, how much does the US stock market drop in a round of adjustment?
2. What should we do if a black - swan event occurs and the drop seems endless?

How Deep is the US Stock Market Adjustment?

First, we need to unify the definition of "adjustment". Usually, adjustments are divided into three levels: daily - line, weekly - line, and monthly - line levels. During a decline, it needs to meet one of the two conditions: amplitude and time (everyone may have different definitions, and this article represents my criteria). 

• Daily - line level: A drop of more than 5% from the highest point, or the time lasting more than two weeks (referring to the time span from the highest to the lowest point).
• Weekly - line level: A drop of more than 10% from the highest point, or the time lasting more than 4 weeks.
• Monthly - line level: A drop of more than 15% from the highest point, or the time lasting more than 4 months.
  Meeting one of the two conditions is enough. Some adjustments are not deep in amplitude but last a long time, and vice versa.

After clarifying the definition, bottom - fishing has two goals:

Goal 1: Buy the position you want.
Goal 2: Buy as cheaply as possible.

The market trend is clear in hindsight but confusing at the time. When an adjustment is happening, we can only be sure of two things - how much the price has dropped from the previous highest point to today and how many days it has dropped. It may continue to drop, consolidate, or rise again. So, there is a contradiction between these two goals. Buying too quickly may achieve Goal 1 but at a relatively high price. However, if we focus only on buying cheaply, the price may rise before we can buy. 

This requires us to have a probabilistic understanding of the adjustment amplitude in the historical trend of US stocks to set a reasonable goal. 

Taking the S&P 500 index as an example, in the 20 years from 2004 to now, there have only been 7 monthly - line - level adjustments, with the following reasons: 

• January - October 2022: The most aggressive interest - rate - hike cycle in 40 years.
• February - March 2020: The global public - health incident.
• September - December 2018: The trade war combined with interest - rate hikes.
• July 2015 - February 2016: Central economic recession combined with interest - rate - hike expectations.
• April - September 2011: Deepening of the European debt crisis.
• April - June 2010: The European debt crisis and the Goldman Sachs fraud scandal.
• October 2007 - March 2009: The subprime mortgage crisis. 

So, monthly - line - level adjustments in US stocks are very rare, on average once every three years, and each time there are macro - fundamental reasons. In fact, there was no such adjustment in the 44 months from September 2011 to July 2015, showing a long - term bull market. Weekly - line - level adjustments are more frequent, occurring 2 - 3 times a year, and don't require fundamental reasons. As long as the stock has risen too much, it may be adjusted. 

Therefore, when bottom - fishing, we first need to judge whether this is a weekly - line - level or monthly - line - level adjustment. But stock trends are affected by various new news and are difficult to predict accurately. The Federal Reserve is not under your control, and bad and good news won't come as you plan. Fortunately, you can still decide your own goals. 

You need to think about a question. Imagine it as haggling with a vendor. If you can only choose one of the two goals, "buying" or "buying cheaply", which one would you choose? 

If it's the former, you should assume the adjustment is at the weekly - line level and plan accordingly. In this way, even if there is actually a monthly - line - level adjustment, you can still achieve your first goal. Similarly, if your goal is "buying cheaply", you should prepare a bottom - fishing plan for a monthly - line - level adjustment. 

However, generally, I suggest taking "buying enough" as the first goal, especially when you have spare money. One reason is that monthly - line - level adjustments occur once every three years, with a relatively low probability. Another reason is that if you have spare money and can't buy US stocks, you may invest in other high - risk products. 

With a goal, the plan becomes much simpler.

Time Plan and Position Plan

The first question in bottom - fishing US stocks is when to start the plan.

Take the bottom - fishing of a weekly - line - level adjustment as an example. As long as the price doesn't reach a new high in two weeks, a daily - line - level adjustment is actually happening, and you should prepare a bottom - fishing plan for a cycle - level adjustment. 

The core of bottom - fishing US stocks is two words - batch. There are two types of batch plans:
One is time - based batching, buying at certain time intervals.
The other is position - based batching, buying when the price drops to a certain level. 

According to the trend in the past 20 years, for weekly - line - level adjustments (excluding monthly - line - level adjustments), the average time from the high point to the bottom is 10 weeks. So, for time - based batching, it can be divided into three batches. Starting from the high point, bottom - fish once every three weeks, and the interval between the second and the first time can be a bit longer. 

For position - based batching, it can also be divided into three batches. Buy a batch when the price drops 3% from the high point. If the maximum drop is 10%, the entire bottom - fishing plan can be achieved. 

The probabilities of completing these two plans are different. The time - based plan can generally be completed, unless it's just a daily - line - level adjustment and the price quickly reaches a new high again. But that's not a pity either, as at least you've caught an opportunity to add positions during a daily - line - level adjustment. However, the position - based batching plan may not be completed. Many weekly - line - level adjustments in US stocks only last a long time but don't reach a 10% drop in amplitude. 

If the first goal of a weekly - line - level adjustment is to "complete bottom - fishing", then "time - based batching" should be prioritized. Even if the drop hasn't reached the expected level, as long as the adjustment time is up, the batch - bottom - fishing plan should be implemented. 

Looking at the bottom - fishing plan with a monthly - line - level adjustment as the goal, the average time to reach the bottom each time is 6.5 months, but there is a big difference. So, we should have the idea of "most likely not being able to complete the bottom - fishing" and follow the principle of "taking as much as we can". The positions don't need to be evenly distributed. Instead, the first batch is 1/2, the second batch is 1/3, and the third batch is 1/6 of the total plan. 

The time - based plan can be divided into: the first month, the third month, and the sixth month.
The position - based plan can be divided into: a 3% drop, an 8% drop, and a 15% drop. 

In this way, many times, when you target a "monthly - line - level" adjustment, you actually complete a bottom - fishing plan for a weekly - line - level adjustment in the end, but the quantity may not be enough. So, at the beginning, I still suggest giving priority to the weekly - line adjustment plan as much as possible. 

To sum up, bottom - fishing in US stocks can be simply summarized as three dos and three don'ts: 

1. Do make a batch plan, don't make random decisions and trade impulsively during the trading session.
2. Focus on "buying enough" and supplement with "buying cheaply".
3. Prioritize "time - based batching" and supplement with "position - based batching". 

Bottom - fishing in US stocks is a very mechanical plan, and the long - term upward and relatively low - volatility trend of US stocks is the prerequisite for this bottom - fishing plan. However, the stock market is ultimately a place for human - nature games, and the economic operation itself is unpredictable. Black - swan events can happen at any time and will definitely happen. 

If the adjustment time or depth exceeds the plan, how should we respond? What should we do if a black - swan event occurs?

Black - Swan Events

The above adjustments are classified by monthly - line and weekly - line levels, which has the advantage of clear standards. But even for monthly - line - level adjustments, there are big differences. In fact, in 2008 and 2020, they were economic crises rather than stock - market adjustments. 

So, market adjustments can also be divided into three categories according to the reasons: 

1. Natural adjustments caused by excessive cumulative increases, but the macro - fundamentals are basically good - most daily - line and weekly - line - level adjustments are like this.
2. Adjustments caused by overvaluation combined with economic recession or a shift in interest - rate policies to a negative side - a few weekly - line and most monthly - line - level adjustments belong to this category.
3. Economic crises or major recessions caused by systemic risks - a few monthly - line - level adjustments, or long - term bear markets, belong to this category. 

In the past 20 years, the subprime mortgage crisis in 2008 and the public - health incident in 2020 both belong to the third category. The former dropped 58% in more than a year, and the latter dropped 35% in two months. So, the third situation exceeds our bottom - fishing plan and needs to be analyzed separately. 

However, at the beginning, there is no difference between a crisis and an adjustment. When the US stock market just started to drop in 2007, the market thought it was an economic recession. After the Federal Reserve started to cut interest rates, the stock market rebounded. At the beginning of 2008, investors had already started to bottom - fish in large numbers. 

So, during the bottom - fishing process of an adjustment, we also need to constantly observe whether something that didn't happen at the beginning of the drop has occurred, or whether the factors causing the initial drop have deteriorated. 

Taking the recent deep drops as examples:

A standard bear market like in 2022, which dropped 27% in a year, is the easiest to judge. It is driven by standard macro - logic. Everyone is discussing interest - rate hikes, all prices are soaring, and every month there is data telling you that this month is worse than last month. At most, there is a loss at the beginning of bottom - fishing, and later you will naturally know that this is a long - term battle, and the bottom - fishing time needs to be extended.

A "once - in - a - lifetime" plunge like the public - health incident in 2020, which dropped 36% in one month, is caused by an unpredictable black - swan event. It's non - economic and very scary in the short term, but once it's over, it's over. In this case, we can only endure it.
The most difficult one is the 58% drop during the 2008 financial crisis, which is actually a combination of the above two situations. In an ordinary recession, a crisis event occurred, triggering a deep - recession bear market. It's also unpredictable and can only be dealt with. 

If we go further back, the bursting of the dot - com bubble in 2000 was a rare plunge caused by overvaluation, which in turn dragged down the economy. But the valuation level at that time was much higher than it is now. It was a predictable "grey - rhino" event, but no one was willing to "get off the bus" first. 

Summing up these similar drops in US stocks, you will find that we shouldn't predict the drop in US stocks in advance. The most important thing is to face the reality and respond after it happens. The sky won't fall. 

Of course, not making predictions and making timely and correct responses after it happens require you to pay attention to the market. You can't just allocate assets without management like in financial management. You still need to assess whether there is a possibility of a change to a crisis after the price has dropped to a certain stage.