What happened the last time we fell 3%?

By Jani Ziedins | End of Day Analysis

Oct 10

Free After-Hours Update:

The S&P 500 was murdered Wednesday, collapsing 3.3% as the market plunged for the fifth-consecutive session as interest rate fears spiraled out of control. This was the worst down-day since last February’s selloff.

While that sounds dreadful, could this actually be a good thing? Did anyone look back at that fateful day in February when we fell 3.75%? If you did, you already know what happened next. Panic driven selling pushed us down another 50-points early the next day, but rather than collapse lower, supply actually dried up and we finished the day up 1.5%. And not only that, that morning’s lows were the lowest point for all of 2018 and we have been higher ever since. Will this time be any different?

Without a doubt, we could fall further, but is that an excuse to abandon this market? Or is this a golden opportunity to jump in? Only time will tell, but at this point, the best we can do is look at history.

I fear the slow, insidious grind lower. Those are the losses that accumulate when no one is paying attention. What I don’t fear are the big, headline-grabbing down-days. The one that gets everyone’s attention and makes headlines around the world. That’s because those big, flashy days don’t have any substance. As the saying goes, the flame that burns twice as bright only lasts half as long.

They don’t get any bigger than 1987’s 20% collapse. That day will forever live in market folklore. But what you rarely hear is the market actually finished 1987 with a respectable 6% gain. And not only that, all of those 20% losses were erased within 12 months. It doesn’t sound nearly as scary when you put that 20% loss in context.

But forget 1987, we don’t even need to look further back than earlier this year to see the same behavior. February’s selloff sliced nearly 10% off this market. Yet we reclaimed all of those losses within six months.

I will be the first to admit I didn’t see Wednesday’s dramatic selloff coming. I have been bullish on this market since February’s bottom and today’s 3% selloff doesn’t change anything. Dips are a healthy part of every move higher. And that includes frighteningly dramatic days like Wednesday. If a person cannot handle a 3% dip in the broad market, or a 10% dip in a highflying tech stock, they probably shouldn’t be speculating in stocks.

If I wasn’t already fully invested in this market, I would be buying this dip with both arms. I’ve been doing this for way too long to let a little irrational selling scare me off. But that is what works for me. If the market’s volatility is keeping a person up at night, that is a sign they need to reduce their position sizes to something that is more manageable. The key to surviving the market is keeping your head when everyone else is losing theirs. Do whatever is necessary to reclaim your perspective. If that means dialing back your position sizes, then that is what you need to do.

Back to the big picture, if a person believes a 0.25% bump in Treasury rates will strangle the economy, then they definitely need to sell and lock-in their profits. But if a person doesn’t believe this economy is teetering on the verge of a recession, then they can ignore the noise and wait for higher prices. As crazy as it sounds, I still believe this market is setting up for a year-end rally. Come back in three months and we’ll see who was right.

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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.

Baron October 10, 2018

This is a great article for a day like today. I like your comment about if one cant take a 3% drop or 10% in tech, one should prob not invest in equities. I made $5k Monday and Tuesday…then lost $12K today. Im not happy with the week so far, obviously, but the stocks ive invested in have good fundamentals and earnings season is right around the corner, so I expect upside. Emotions must be removed, if one wishes to invest properly, still, we arent robots and days like today do instill a bit of anxiety. Therefore, I appreciate your post as it helps ground people in the reality of the market and helps people escape the “Sky is falling!!!” narrative the MSM has been pushing all day. As the old newsroom saying goes: “If it bleeds, it leads”. Thats all today has been. At least thru EOY, the market should recover and excel

    Jani Ziedins October 11, 2018

    I’m glad my article reminded you to keep things in perspective. The market can be very deceitful and it often tricks us out of our positions just before proving us correct. But at the same time, we also need to exercise risk management so that we can be wrong a survive to fight another day. Good Luck!

Andrew October 10, 2018

If you are right about a significant rally by year end, I will buy a one-year subscription. 🙂

    [email protected] October 11, 2018

    I second that!

George Jones October 11, 2018

Exactly what I expected from you. “I’m tough I can handle a 3% decline, stock will bounce back”. Stupid and stubborn are a bad combination. There isn’t a bats chance in hell that stocks will rally into year end….because everyone is trapped long, including you. A great example why this blog is complete horse shit.

And who was the smart one who sold at the end of August? “You’ll regret selling” says Jani. Ok pal….

[…] surprise anyone. Markets that fall down the elevator shaft typically land on a trampoline. Last Wednesday I wrote the following after stocks tumbled […]

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