Falling Knife

The phrase “to catch a Falling Knife” refers to the temptation to buy the Stock after a rapid drop in the Stock Price. If the Stock Price rebounds, then it could be a shrewd investment. If not, it could be a bloody affair.

During a Stock Market drawdown or worse a crash as prices drop, previously highly priced Stocks are seen as buying opportunities. This is a very real temptation.

Is the Stock Market over reacting?

Is the fall over done?

Often the temptation can be driven by two positions.
First, to make up for the losses on an equity holding that has quickly lost a significant portion of its value. This is termed as “doubling down”, as the average entry price is lower.
Secondly, an investor buys the Stock as it falls, to catch the knife, by attempting or hoping to buy the Stock near to the low point.

Both strategies can be equally flawed. Both are based on hope. Research and an understanding as to why the Stock Markets are in a Drawdown Phase is required. In 2022, this was due to rapidly rising inflation, leading to rising interest rates and then the fear of a possible recession. Of course, Stock Markets “over correct”, and markets can rebound very quickly. Black Monday, October 1987, recovered in around 3 months. Following the 2008 GFC, in March 2009, the Stock Markets, turned on a Dime and set off on a dramatic bull run.