Dr. Brett Steenbarger on market bottom

Bottoms are made when selling becomes exhausted and long-term participants perceive value and lift stocks sharply off their lows. That exhaustion can occur over a period of months, as fewer stocks and sectors make new lows over time and individual stocks and sectors find fresh buying interest. Thus far, we’re not seeing such selling exhaustion; weakness has, so far, begotten further weakness. While it is tempting to call market bottoms and pick up bargains, all we can say Wednesday is that a historically weak market just got weaker.”

The "secret" ingredients

To be successful in the markets you need to know:

– what to buy (equity selection);

– When to buy it and when to pass on it (risk management);

– When to exit (time management).

The most essential part of equity selection is finding/creating a trading system with positive expectancy. Look for the catalyst/catalysts than has/have the potential to start a big move in the desired direction. There are two catalysts I focus on – earnings related and sector related. I pay attention to price, because it measures the only factor than really moves markets – confidence. It always says more than any other source of information. Reaction to news is more important to news itself.

Risk management has two basic elements: defining risk/reward ratio for every position I consider to get involved in and position sizing (how much to buy, what % of capital to put on risk).

Time management involves taking into account the opportunity cost. How long to stay in a position?

China allows short selling and margin purchases

Sept. 26 (Bloomberg) — China’s cabinet agreed to let investors buy shares on credit and sell borrowed stock to help develop Asia’s second-largest market after prices and trading volumes slumped, an official familiar with the plan said.

China’s government is betting the changes will boost trading without spurring further declines after state share buybacks helped the CSI 300 Index rebound from a two-year low.

China has scrapped the tax on stock purchases and relaxed company buyback rules to help support the world’s second-worst performing stock market this year.

The CSI 300 rose 0.9 percent today and added 8.2 percent this week, the first weekly gain in nine weeks.

On short selling

Selling borrowed stocks serves as a balance to buying stocks with borrowed money.

Careless leveraging will always cause greater evil than any size of short selling.

Short selling reduces volatility, cuts the bid/ask spread, makes the market more predictable.

Short selling provides healthier, higher quality market.