Bottom-Fishing Can Be Scary

In a rough year for stocks, it’s tempting to try to grab bargains now. Just be careful

- By Pat Regnier and David Rocks

With U.S. stock market indexes taking some nasty dips in recent weeks and the S&P 500 down about 10% for the year even after a May 4 rally, it’s open season for one of the most popular—and most dangerous—sports on Wall Street: bottom-fishing.

As the phrase implies, bottom-fishing entails trying to spot the low point of a market sell-off to make some big stock purchases and reap outsize rewards from a quick rebound. It should be stated upfront, and in boldface type, how risky it is to attempt to time the market like this. It’s a matter of luck as well as skill, so even those who get it right find it hard to repeat their success. Anyone who listens to sober-minded financial advisers will know to avoid big moves in and out and be content knowing that, as a regular saver trickling cash into investment or retirement accounts slowly—week by week or month by month—you’re probably already doing a little bottom-fishing, anyway.

Still, it’s easy to appreciate the allure of this sport: It’s like shopping in a store where prices have suddenly been cut. The key question is whether this weakness in markets is just a routine correction or the start of a bear market plunge, which is defined as a loss in excess of 20%. If it’s the former, the rebound from the low can be very strong. Following the end of non-bear-market corrections since 1970, the S&P 500 has surged an average of 14% in the subsequent three months and posted an average gain of 27% in 12 months, according to strategists at BMO Capital Markets.