Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Warranted Selling Or Buying Opportunity Of The Year?

Published 08/25/2015, 12:12 AM
Updated 07/09/2023, 06:31 AM

SPX Daily at Close, August 24, 2015

The S&P 500 officially entered correction territory Monday as the index closed down more than 11% from recent highs. Trading volume surged to one of the highest levels in history. It’s hard to put yesterday’s move in context since so few times have we seen such a volatile day where prices jumped multiple percentage points every hour.

Clearly this is one of the most emotionally charged markets this decade. The question before us is if these dramatic moves are warranted based on severely deteriorating fundamentals, or if this is simply an overreaction and the buying opportunity of the year.

The first thing we need to understand is what kind of selloff this is. Selloffs take one of two forms, the insidious grind lower that slips under the radar because few are alerted by slow moving declines. The other is the breathtaking plunge that makes front page headlines around the world. I don’t think anyone needs me to tell them which type we find ourselves in the middle of.

But here’s the thing, the selloffs we fear the most are typically the ones we don’t need to worry about. Sharp moves lower are often followed by sharp rebounds. Last October’s 10% Ebola plunge bounced back within two weeks. Five years ago we recovered from 2011’s 20% U.S. Debt downgrade within six months. While everyone remembers 1987 for the largest single-day selloff in market history, few remember that we actually finished 1987 up 2%. The most similar selloff to our current situation was the 1998 Asian financial crisis that saw us tank over 20%. But you know what—we were making new highs within five months.

The selloffs we really need to worry about are the slow grinds lower. While most people remember the financial crisis that consumed our markets in October 2008, the market actually topped a year earlier in October 2007. One of the largest selloffs in market history started in the Fall of 2007 when no one was paying attention. While this recent plunge shoved us down nearly 250-points across five trading sessions, in 2007 it took us four months to fall 250-points! The lesson from history is, we should fear the selloffs that few pay attention to, not the one the world is fixated on. People are free to disagree with me because “this time is different”, but they’re arguing against history.

To clarify a little confusion that arose from yesterday’s post. In one breath I said that buy-and-hold investors should stick out this volatility, while in another breath I said I pulled my money out before Friday’s big plunge. Many people were confused by these conflicting statements, so let me clear things up. The difference is timeframe. I’m a reasonably active trader and move in and out of the market one or two times a month. My trading strategy is to take advantage of one, two, and three percentage moves in the index, take my profits and then move on to the next trade. Most savvy, active traders would have gotten out of bullish positions last week when the market started moving against them. That is why it is my assumption that anyone still in the market has a longer holding period than I do.

If someone makes a couple of trades a month, I would suggest they get out-of-the-way of any move lower. But if a person only makes a couple of trades a year, holding through dips is part of their game plan. That’s why it is called buy-and-hold, not buy-and-hold-until-you-get-scared. While this move is dramatic, I don’t see a reason for long-term investors to dump their stock at a steep loss. Hold on and in six months or less we’ll be making new highs. As always, keep the comments and questions coming.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.