What happened the last time the index fell nearly 6% in one week and what does it tell us about what comes next?

Free After-Hours Analysis: 

The S&P 500 crashed another 1.9% on Friday, leaving the index down nearly 6% for the week.

It’s hard to believe we were sleepily notching record highs little more than two weeks ago. But that’s the way this usually goes. Few things sour faster than the market’s mood.

This rout in the equity market was initially triggered by an “unexpected” jump in interest rates. (I put unexpected in quotes because seriously, who didn’t see this coming??? Anyway…)

Since the market doesn’t do things in half measures, rather than respond to these changes in the bond market thoughtfully and deliberately, the crowd started impulsively rushing for the exits. Not because they thought a few basis points increase in Treasuries was going to wreck the economy, but because they assumed other people were going to panic. And logically, the only thing to do in those situations is panic first! Or at least that’s what happens when we let our lizard brains take over.

Now we find ourselves down 9% from those highs two weeks ago and the question becomes, what comes next?

Well, if we pull up a weekly chart and look back a little more than a year, we see a similar weekly plunge in the stock market (-5.64%) back in late October 2020.

That was the week leading up to the election and traders were afraid of what a President Biden would do to their taxes and regulations. Given how big the “Trump Rally” was, it makes sense the business environment could swing the other way if a Democrat took over.

Sell first, ask questions later was the name of the game back then, just as it was this week. And you know what happened next? Yeah, the market rallied 7.3%, easily erasing all of those prior losses and adding an extra couple of percent just to further humiliate all of the prior week’s impulsive sellers. Ouch!

But that’s the way this usually works. Emotional sellers panic, get out, and prices bounce hard not long after. This story is as old as trading itself.

With the index already down 9% from recent highs, is that low enough? Probably. While I don’t expect a repeat of 2020’s 7.3% snapback, odds are good next week will enjoy a meaningful bounce. Selloffs that go too far in one direction inevitably end with a snapback that goes too far in the other.

Maybe next week’s bounce isn’t the real bounce and panicked sellers are correct that this couple tenth’s rise in Treasury yields will lay waste to the US economy. But odds are good they overreacted just a tad this week.

Now for how I will trade this. I never, ever buy dips. That’s a fool’s game. But bounces? Yes please!

Maybe the market bounces Monday. Or maybe it happens Tuesday. Either way, nothing is going to keep me from jumping aboard that next big rebound.

And now for a quick rant: anyone selling on Friday is an idiot! There are only two ways to handle these situations. Either we sell early or we hold through it. Only fools wait until they get too scared and then impulsively dump everything near the bottom.

The really isn’t that hard! Back on January 5th, I warned readers that smart money was selling:

Sell and see what happens from the safety of the sidelines is how I’m approaching this. If prices bounce Thursday, great, I’m getting back in. No harm, no foul. But if the selloff continues, even better, I wait for the next bounce and buy at even lower prices. That’s a win-win in my book.

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Well, here we are two weeks later and 350 points lower and I’m sitting on a big pile of cash itching to get back in the market.

I tested the water with a couple of small buys since then, but every time selloff started making new lows, I got out and waited for the next bounce. And the lower we go, the more excited I get. We’re going to make some good money next week. I can’t wait!

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