Words to the wise: Buy low, sell high, and don't follow the crowd.
The Street of Dreams — Wall Street— is paved with clichés. Analysts love to write that stocks offer "positive price potential" and are in "sustainable advances." Price targets get "revised upward." Stocks rarely seem to sport negative potential or falling targets.
And yet, some of the clichés can be helpful, if only as red flags.
Here are some beloved Wall Street adages, with explanatory notes appended:
Santa Claus rally
Stocks often rise right after Christmas.
In fact, the entire fourth quarter is, on average, the year's strongest. The Dow industrials have suffered a fourth-quarter decline just once in the past 10 years — in 1997.
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The fourth quarter usually is a strong time for corporate profits. Investors are looking ahead to big injections of retirement money into stocks in the new year, and at Christmastime, people tend to look for better days to come. So this might — might — be a good time to buy.
Sell in May and go away
Sounds like nothing but a catchy phrase, but it often is good advice.
Over history, the market's biggest gains have come from October through April. From May through September, the market, on average, rises little.
But that's not always the case. The Dow Jones industrial average rose almost 4 percent from May through September of this year. In most years, though, the winter is better for stocks. Why? See above.
Summer rally
Sure, stocks tend to rally at least once in most seasons, but historically, summer tends to be a weak period. Stocks tend to bounce up and down over the summer and hit bottom in September or October.
September, historically, is the worst month for stocks, the only one that averages a noticeable decline. Summer tends to end with a thud.
Beware the dead-cat bounce
Some stocks — and some entire markets — are so troubled they just aren't going to rebound for a while.
In such cases, the temporary bounce is a fake, a rally that won't last. The origin of the phrase, in brutal terms: Even a dead cat will bounce a little, if it falls from a high enough perch.
A dead-cat bounce can be caused by bearish investors covering their bets. They sold borrowed shares in hopes of replacing them with cheaper ones bought later, called shorting. After their buying starts, the stock climbs, but when they finish, the decline resumes.
Bulls and bears make money; pigs get slaughtered
If you have a clear investment plan, you have a chance of success. If you get greedy, pushing a bet too far or staying in a risky investment too long, you may suffer.
Don't fight the Fed
An old rule on Wall Street is that two things drive stocks: corporate profit and interest rates.
When the Federal Reserve is raising interest rates, as it has been for almost 18 months now, it puts a burden on companies and consumers alike. You should expect the stock market to have trouble — which it has. This time, at least, stocks haven't fallen, as they have during many previous periods of rate increases.
Don't fight the tape
This has mostly to do with crowd psychology. If the market, once tracked by ticker-tape machines, is moving strongly in one direction, up or down, it may not be a great time to bet the other way.
No matter how smart you are, or how good your analysis, short-term market momentum can overwhelm your genius.
Stocks climb a wall of worry
This seems like upside-down logic, but it actually makes sense. Stocks tend to rise when investors are anxious.
Bull markets begin after people have taken money out of the market, and have it free to invest. As investors resolve their fears, one by one, they put money back in and stocks rise — climbing a wall of worry.
Stocks top out when people become too optimistic. This year, they rose in late October, after worries about profit and interest rates had grown, then ran out of steam as worries eased in December.
The corollary is instructive, too: Buy to the sound of cannons; sell to the sound of trumpets. Translation: Buy when people are too pessimistic, sell when they are too optimistic.
Don't catch a falling knife
This is the opposite of the "wall of worry" maxim above. Sometimes, when things look bad, they are bad, and it is too soon to buy.
Think General Motors Corp. Anyone who tried to catch GM stock this year found it knifing right through their hands.
Fear, greed drive the market
When the stock market is doing well, investors set aside fears and build higher and higher expectations for stocks. They become so greedy that they pay inflated prices, thinking stocks will never fall.
Expectations become impossible to meet, and that's when a bear market sets in.
Remember the bubble? As stocks crumble, greed is replaced by fear, driving stocks still lower. Eventually, fears become excessive and stocks have nowhere to go but up. That's when the old "wall of worry" kicks in. Investors begin to work through their fears, and stocks rise. Then comes the greed again.
Buy the rumor, sell the news
Stocks often rise on speculation of pending good news, such as a strong corporate profit announcement. When the news actually breaks, short-term traders sell to take gains.
If profit news doesn't exceed Wall Street expectations, the stock may stagnate or fall. Indexes can do the same.
This also works in reverse: If bad news is anticipated, sell the rumor and buy the news.