Trading After A Stock Market Crash - Knowing The Next Trend And Switching To Defensive Stocks

After a stock market crash, most traders would become cautious especially those who have been unfortunate to be caught in the crash and have seen a drastic drawdown on their portfolio values.

The traders reaction is almost instantaneous - many will sell or stop loss, some will hold on to their stocks with the hope of the market rebounding soon, while others may just be too bewildered to do anything at all.

The principle of personal wealth management in the aftermath of a stock market crash hinges on the personal financial plan you have established earlier in your wealth management process. I strongly suggest you to start to establish or create a personal financial plan that will outline your entire wealth accumulation processes. Irregardless of whether you are young or old, there is never a better time for you to get your finances in order than to create your personal financial plan. Simply put, start to prepare your retirement plan even if its your first day at work and earning an income!

Returns from stocks and shares are just one component of your financial resources that constitute your income stream. Needless to say, a comprehensive financial plan will encompasses other income streams such as investment into properties, such as residential property, either directly through ownership of residential property or through property trusts. What is more important in the light of the mini crashes of February and March 2007 is that there are powerful relationships between the property slump and financial institutions such as subprime mortgage institutions and bank lending that will impact upon property and housing related stocks and also lending banks and mortgage houses, and these are some sectors that you will want to stay out and wait for the entire corrective process to play out before looking at these sectors. Be aware that there will likely be more failures in mortgage companies, housing developers and lending institutions.

Rather within your portfolio, you will be looking at a switch to defensive stocks. Stocks that are staple in nature, such as food related stocks, and utilities such as energy, power, telecommunications are some examples of defensive stocks. Gaming stocks related to casinoes, horse racing and others are also some stocks that will feature. When the feel good factor is lost in the aftermath of a crash, the buying power or consumer spending will be less.

In looking at these stocks, go for quality - because in the aftermath of a stock market crash, most stocks would be affected. This means quality stocks would also have stumbled somewhat in price along with all the stocks across the board together with the lesser quality ones. The difference is that the quality stocks will rebound faster, whereas poorer quality stocks will linger at low levels.

The main question next is when should you perform the switch over to these stocks? Some will take comparative price-earning ratios after similar market crashes to provide guidance. A more creative way is to look at historical PSR or Price-Sales ratio as a guide. But for accurate timing, traders can use technical analysis or charting to help in determining the next trend.

Your personal financial plan needs to be fine tuned and monitored along the way especially in the light of a market crash where stock market returns is one of the major income streams within your financial plan. Switching into defensive stocks might be good, but it is knowing the timing of the next trend when stock prices have bottomed that you can then perform the switching to lead to maximum profits.