What is a 'Graveyard Market'

A graveyard market is a prolonged bear market where existing investors want to get out and new investors do not want to get in. A graveyard market is so called because it is an undesirable situation in which to be trapped. Existing investors want to exit the market but cannot because it would mean crystallizing their large unrealized losses. At the same time, new investors are very reluctant to get in because they prefer sitting on the sidelines, rather than risk being sucked into the morass.

The term “graveyard market” can also refer to securities that are infrequently traded because of a lack of investor interest.

BREAKING DOWN 'Graveyard Market'

A graveyard market is generally characterized by huge declines in the market over many months, if not years. Risk aversion is the dominant theme, and although valuations may appear attractive by historical standards, investors may be unwilling to commit capital to the market until they have evidence of a sustained turnaround.

The 2001-02 “tech wreck” and 2008-09 bear market (and subsequent global credit crisis) are prime examples of graveyard markets. While many bellwether technology stocks were trading at compelling levels during and right after the 2001-02 bear market, and numerous stocks were at record lows in the 2008-09 bear market, there was little buying appetite by spooked investors.

But those investors who adopted a contrarian viewpoint and invested heavily in equities during these graveyard markets reaped rich rewards in the subsequent rebounds that took indexes to record highs.  

How should investors avoid being stuck in a graveyard market?  Active trading rather than a “buy and hold” strategy appears to be the answer. Investors should avoid investing heavily in equities during boom times, especially in the late stages of an equity rally, since boom inevitably turns to bust. As well, investors should try and ignore the headlines during the darkest days of the bear market, and venture into the graveyard. When the market turnaround occurs and equities begin to boom once again, they will be glad they did so.

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