Another Rough Day For The Markets: Now What?

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Monday seemed like it could have been a reversal day. After a big drop Thursday and a bigger drop Friday, stocks reversed hard on Monday. Sure, shares weren’t exactly higher on Monday, but they did post a solid recovery off the 1,000+ Dow drop in the morning. A -600 close wasn’t good, but it was a 50% recovery off the worse levels of the day. Adding to that…

The Dow opened up 400 and traded around there much of the day Tuesday, causing many investors to think the worst of this crisis had passed. After spending nearly all of the day up in this lofty range around 300-400+ on the Dow, shares started to sink around 3pm ET.

And then, they started to really plunge. Within an hour, all the gains of the day would be wiped out. The Dow, which had just recently been +400 found itself down more than 200 for the day. That’s right, shares utterly wiped out, dropping 600 big on

Yes in the pivotal final hour.

So what to do now? Is this the moment to throw in the towel to sell it all before things get even worse?

First off, why’d we crash at the end of the day? There’s no clear reason. There weren’t any foreign markets that collapsed in that span, and crude oil was well behaved. Nor were there any particular large-cap stocks leading the dive.

Yes, it does appear this 600 point rapid final-minutes Dow plunge was the work of unthinking computers rather than anything logical or explicable. So, if we dropped without a reason, should we be buying tomorrow?

Yes, probably, but it’s complicated. If you’re trading with a very short-term outlook, let’s say three days or less, then I can’t help you. The market may rocket, it may nosedive, or it could do a bunch of nothing tomorrow. Anyone promising to tell you what will happen on a short term basis is misleading you.

On a longer term outlook, yes, the market probably isn’t a bad buy here. To be clear, no the market isn’t “cheap” as value investors define it. The normalized PE is still well above “bargain basement” levels.

However, depending on the index, the US is down close to 15% over the last week. We’re way oversold, and a big huge bounce should come soon. Whether or not you think prices head lower into the holiday scene is hardly relevant.

The thing is, with shares down this hard, a bounce is nearly inevitable, regardless of the state of the broader economy. After plunges this big over the last thirty years, a big short-term recovery is almost inevitable.

Whether or not it sticks for the longer term is a different question. There were big bounces in 2000, 2007, and 2011. Given those economy crises, we know how those turned out.

Regardless, in general (and yes, this is general, this isn’t specific advice to buy or sell a security!) we feel that we’ve reached an attractive level here at sub-1900 S&P 500.

Could things go lower? You betcha, absolutely. Is it likely? No, no it isn’t. In fact, after the biggest one-day VIX spikes in history, returns are usually fantastic for stock buyers. According to that chart, a vast majority of buyers will enjoy a positive return 1, 3, and 5 days after a crash incident.

Since both Friday and Mondays were “crashes” according to that standard, we should be well primed for the inevitable recovery afterwards.

What are we to do? For one, you need to reconsider your portfolio allocation. If you are having trouble sleeping tonight, or you’ve had nightmares recently, you should probably sell some positions. Your health is more important than your net worth; pare your assets down to a level where they don’t cause you to lose sleep.

So yeah, if you’re already nervous, this isn’t the point to be trying to buy more. That said, don’t sell anything! Retail investors – smaller players – are famous for underperforming the market as a whole because they puke up their shares to the bigger boys during these sorts of market routs. I entreat you, don’t be that guy who sells out at the bottom.

If you’re feeling good about your position and asking how you can take advantage of the current downdraft – then yes, this is the time to be buying. What to buy? You can target particularly oversold stocks – there’s plenty of stuff down 20% or more over the last week.

On the other hand, you can buy your favorite stocks at a good price. They may not be smashed exactly, but the big-cap market leaders like Apple (AAPL) have indeed dropped far off their highs in recent days.

Regardless of what you do, the important thing is not to sell. If you own a well-diversified portfolio, you probably own mulitple stocks down 20-30%, if not more. And yes, it feels terrible! But don’s sell, things will improve.

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