Last Friday was just a 'ho hum' day, right? The Dow Jones Industrial Average had their first weak session, closing down about 45 points or so. Boring day, volatility ticked up to 14%. You know I'm being a bit sarcastic, as some political news were the catalyst for a mind-blowing 400 point nosedive in the morning, a dynamic 30 minute period with nothing but sell orders.
The NYSE tick kept pounding at -1000 readings minute after minute as the support for the 30 stock index melted like down like a hot knife through butter.
But as we have seen so often, the buyers picked up the very deep dip and the indices rallied back to close only marginally lower. That scary drop though was something to marvel at and seemed all too familiar. I remember it, just about a year ago on election night, and then during the brexit vote just five months earlier, in 2016.
Those precipitous drops on heavy volume were soaked up by the dip buyers the next morning, and the markets were off to the races. In fact, new all time highs were not far off after the brexit drop and the election of Donald Trump as President. We saw markets rise to new highs within weeks amid strong turnover, a classic sign of institutional buying.
We have long known that algorithmic programs react violently to news-driven headlines. There seems a coordinated effort in these cases: bids drop immediately, volatility products explode as demand for short term protection increases, gold is bid as are bonds (usually). Are these rational responses to news item effects? They may work in the short run, but as we have seen in past instances they don't last for long.
Many would say 'buy the dip' is the right approach, and that certainly paid off in 2016 and may have paid off last week, we'll have to see how it turns out. However, I would suggest keeping some powder dry until the dust settles, waiting patiently for the downdraft to actually be finished, there will always be some opportunity to get on board in this stock picker's market.