The Ugliest of Days

S&P500 daily at end of day

End of Day Update:

The worst day in four-years capped off the worst week in just as long. It was a brutal, relentless selloff that shoved us down 3% for the day and nearly 6% on the week. Volume exploded to the highest levels in nearly half a year. And if those stats didn’t fully capture the sense of urgency, the VIX saw the biggest weekly percentage gain on record.

While I’ve been writing about the pervasive bearishness seen among active investors that contribute to internet forums and answer investor surveys, today’s selloff broke beyond the financial pages and became front page news. People who don’t regularly follow the stock market heard about today’s plunge. That opens the door to an entirely new population of sellers. While it’s been a great ride from the 2009 lows, today’s weakness could give the average 401k investor flashbacks to 2008’s fear and regret. That creates the very real opportunity for this weakness to spiral out of control.

But before we get too carried away, we survived sharp selloffs in 2011 and 2014, so we know this storm will pass too. The 2011 selloff was nearly 20% and came on the heels of a S&P downgrade of United States debt. That drop did a lot of damage but we were making new highs within six-months. Last year’s nearly 10% Ebola scare rebounded to higher levels within weeks. Without a doubt this selloff’s recovery will fall somewhere inside this range. Armed with that knowledge, we can decide how to trade this.

If we will be back near the highs in less than six-months, would you still be tempted to dump your stocks at a steep discount today? If yes, then sell. If no, then resist the temptation to bail out and stick to your buy-and-hold plan. The worst way to trade the market is buy when it feels safe and sell when it is scary. Remember, risk is a function of heights, meaning this week’s 120-point selloff makes this the safest time to own stocks all year. Think about that for a moment.

But don’t expect the rest of the market to think about the situation this rationally. There is a good chance Monday will be another bloodbath as a portion of the 401k crowd tells their financial planners to “sell everything”. Mutual funds settle at the end of the day and a surge of people placing mutual fund sell orders could show up late Monday. But once those people are out, we’ll probably run out of sellers and be poised to bounce on tight supply. The best profit opportunities come from buying other people’s panic and the pickings are really good right now. Keep your head and you’ll come out on top.

Jani

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