HomeAnalysisPiggy’s Trading & Investing Tips: Always beware of bull traps

Piggy’s Trading & Investing Tips: Always beware of bull traps

PIGGY has been watching the markets and witnessed episodes of bull runs on the Zimbabwe Stock Exchange (ZSE).

A bull market or a bull run refers to a stock market that is characterised by a sustained rise in share prices with most counters trending upwards.

Bull runs normally occur when investors believe the positive trend will continue for the long term.

Bull markets generally take place when the economy is growing.

For example, periods of strong gross domestic product (GDP) and a drop in unemployment rates tend to coincide with a rise in corporate profits.

Investor confidence will also tend to climb throughout a bull market period.

The overall demand for stocks will be positive, along with the overall tone of the market.

Another feature is that there will be a general increase in the amount of IPO (Initial Public Offering) activity during bull markets.

However, in the case of the ZSE, the exchange rate movements and inflation pressures have meant that the stock market has been a feasible option for institutional investors to preserve value.

As a result, there has been a demand for quality stocks, and this has pushed prices up.

Bull markets are difficult to predict and analysts can typically only recognise this phenomenon after it has happened.

However, bull runs present an opportunity for investors to take advantage of rising prices by buying early in the trend and then selling when stocks have reached their peak.

This means that timing is everything.

Of course, knowing exactly when stocks are at the bottom or the peak is impossible.

Piggy recommends that investors closely follow market reports, results releases, and trading updates to get it right in terms of timing.

Investors should also be wary of what are called “bull traps”.

Generally, a sudden surge in demand for stock will occasionally bring a sudden surge in supply and this may push the price down.

Holders of recently acquired stock can then end up with losses.

Seeking exposure in well-managed (good corporate governance), cash generative and liquid stocks tends to limit risks of a bull-trap.

One must hold on to the stock of the companies which have been performing well in the recent quarters.

Such companies (referred to as blue chips) are typically debt-free with consistent profits and a business model, which is hedged against market uncertainty.

Some of the blue chips include Delta, Econet, EcoCash Holdings, Simbisa Brands, Padenga Holdings and Hippo.

Piggy also recommends exposure in companies that have multinationals as shareholders given that this tends to improve corporate governance and the quality of management teams.

  • Get more tidbits on the stock market by joining a PiggyBankAdvisor WhatsApp Group (+263 78 358 4745).
  • Matsika is the head of research at Morgan & Co, and founder of piggybankadvisor.com. — batanai@morganzim.com/ batanai@piggybankadvisor.com or +263 783 584 745.

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