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Market Upheaval June 22,2022
The S&P reached official bear market territory last week, albeit closing just above the down 20% benchmark of a bear on Friday. Records are being set in many securities as the ongoing market carnage continues. The Dow is on track to have its longer losing streak in over a century.
The major stock indexes continue to erode, the key word here being “erode” in lieu of an all-out fast crash.
Erode means a continuing disintegration over time. As painful as that is for investors, the next event could be even more so.
As mentioned before in Money Matters, historically, when markets experience a continuing erosion over a prolonged period of time, a capitulation event may need to occur before the fall in stocks comes to an end.
Capitulation is a throw-your-hands-up, toss–out-the-baby kind of sell-off which signals investors as a whole have reached a breaking point where they just sell, regardless of any rhyme or reason.
In light of the brutal daily declines we have seen in the Dow in the last few months which have included more than a 1,000 point drop on May 5th, a capitulation event could be in the order of a several thousand point drop in the Dow if and when it occurs.
Keep in mind no one can forecast market direction at any time and markets may not necessarily repeat past movements. It is concerning however that an event such as a sell-off of that magnitude is possible.
Prudent money managers and option traders utilize stop loss strategies to limit losses and it is in my opinion that retail mom and pop investors should emulate such methodologies. This is done by lightening up on holdings along the path of a sell off event. In speaking with many investors of late however, many are just painfully sitting on holdings and hoping things get better.
It is true over time, the market has recovered from every set back, although some setbacks hurt balances so bad, it took a long time to recover losses.
No doubt, selling some stocks on the way down raises cash so when the bottom does materialize, there is dry powder to buy stocks at much lower levels. The more severe the crash, the better the prices on stocks will be at the bottom and the higher the yields on dividend paying stocks will go.
Selling also gives the investor at least some peace of mind that something proactive is taking place. Buying stocks at lower prices with raised cash from previous sales also helps recover losses quicker than just riding out the crash fully invested.
Those with cash from selling during the plunge might look back years later and think “thank heaven I had some cash and picked up some great buys in the midst of the carnage”.
Having a plan goes a long way in helping calm nerves during time of market duress. It also can be prudent money management and installs some loss-control machinery and provides a blueprint for how to maneuver during crashes before the event occurs.
Concluding, the time to have a plan is before the markets correct. Calmer heads will then prevail during times of market upset knowing a plan is in place. Like a fire evacuation plan, the time to formulate such plans are not in the midst of crisis.
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