The Ugliest of Days

By Jani Ziedins | End of Day Analysis

Aug 21
S&P500 daily at end of day

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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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.

Tom A August 22, 2015

“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”.

One crucial difference between then and now is QE or absence thereof. QE1 = Morphine, QE2 = Cocaine, QE3 = Heroine, unless we addicts get QE4 = Fentanyl, will we have enough strength in our drug riddled bodies to lift this market to new highs? That is the million dollar question. Just like the assumption that everyone who wanted to sell had already sold proved to be incorrect, this assumption that we will be at new highs in the blink of an eye may prove to be erroneous unless we get the Fentanyl. Pray that our trusted drug dealer (Fed -up) shows up soon to save us once again.

    Jani Ziedins August 22, 2015

    If you are new to trading, I can understand how you might assume markets only go up when the Fed hands out cash, but let me assure you there have been plenty of times in the past where the market was able to rally without the Fed’s “heroine”.

      Tom A August 23, 2015

      You are correct that in the past (i.e. in normal markets prior to the Fed messing) markets fell normally and rallied back normally. But since 2009, our markets and the world markets have been anything but normal. Let’s just hope that you are correct and once again we will have a V shaped rally to new highs in the blink of an eye even without Fed’s or PBOC’s verbal or explicit intervention. It’s possible but it’s scary when you see people calling for a black Monday type action when market opens tomorrow if the intervention does not come. These people must be new to trading who need to be explained that there have been plenty of times in the past where the market was able to rally without the Fed’s “heroine”.

        Jani Ziedins August 23, 2015

        Every time the stock market had a “lost decade” over the last 100+ years, we came out of it with a ten to twenty year secular bull market. The ’20s, ’50s to early ’60s, and ’80s to 2000. If history repeats itself, this bull market isn’t even halfway done.

        A pillar of your bearish thesis is our economy isn’t very impressive and I will gladly concede that point. But where you see weakness, I see opportunity. Protracted bear markets start when economic activity reaches unsustainable high levels, resulting in the inevitable economic contraction and devastating bear market. I think we can both agree our economy has a long way to go before it reaches overheated levels and is setup for the next major contraction. While stock market selloffs happen inside major secular bull markets, they all bounce quickly and are great buying opportunities.

Jerald Lastrape August 30, 2015

Finally, realize that it’s just one day. It will be over before you know it, and then you’ll get your beauty sleep.

    Jani Ziedins August 31, 2015

    Exactly! There are few joys greater than beating the market because it is such a worthy adversary. There are the occasional restless nights, but this wouldn’t be as much fun if it were easy.

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