The Only Thing We Have to Fear

End of Day Update:

The S&P500 officially entered correction territory Monday as the index closed down more than 11% from recent highs. Trading volume surged to one of the highest levels in history. It’s hard to put today’s move in context since so few times have we seen such a volatile day where prices jumped multiple percentage points every hour.

Clearly this is one of the most emotionally charged markets this decade. The question before us is if these dramatic moves are warranted based on severely deteriorating fundamentals, or if this is simply an overreaction and the buying opportunity of the year.

The first thing we need to understand is what kind of selloff this is. Selloffs take one of two forms, the insidious grind lower that slips under the radar because few are alerted by slow moving declines. The other is the breathtaking plunge that makes front page headlines around the world. I don’t think anyone needs me to tell them which type we find ourselves in the middle of.

But here’s the thing, the selloffs we fear the most are typically the ones we don’t need to worry about. Sharp moves lower are often followed by sharp rebounds. Last October’s 10% Ebola plunge bounced back within two-weeks. Five-years ago we recovered from 2011’s 20% U.S. Debt downgrade within six-months. While everyone remembers 1987 for the largest single-day selloff in market history, few remember that we actually finished 1987 up 2%. The most similar selloff to our current situation was the 1998 Asian financial crisis that saw us tank over 20%. But you know what, we were making new highs within five-months.

The selloffs we really need to worry about are the slow grinds lower. While most people remember the financial crisis that consumed our markets in October 2008, the market actually topped a year earlier in October 2007. One of the largest selloffs in market history started in the Fall of 2007 when no one was paying attention. While this recent plunge shoved us down nearly 250-points across five trading sessions, in 2007 it took us four months to fall 250-points! The lesson from history is we should fear the selloffs that few pay attention to, not the one the world is fixated on. People are free to disagree with me because “this time is different”, but they’re arguing against history.

To clarify a little confusion that arose from last night’s post. In one breath I said that buy-and-hold investors should stick out this volatility, while in another breath I said I pulled my money out before Friday’s big plunge. Many people were confused by these conflicting statements, so let me clear things up. The difference is timeframe. I’m a reasonably active trader and move in and out of the market one or two times a month. My trading strategy is to take advantage of one, two, and three percentage moves in the index, take my profits and then move on to the next trade. Most savvy active traders would have gotten out of bullish positions last week when the market started moving against them. That is why it is my assumption that anyone still in the market has a longer holding period than I do. If someone makes a couple trades a month, I would suggest they get out of the way of any move lower. But if a person only makes a couple trades a year, holding through dips is part of their game plan. That’s why it is called buy-and-hold, not buy-and-hold-until-you-get-scared. While this move is dramatic, I don’t see a reason for long-term investors to dump their stock at a steep loss. Hold on and in six months or less we’ll be making new highs. As always, keep the comments and questions coming.

Jani

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