Comments on Tuesday’s 416 Point Drop

I know, I know… I write a stock market blog and have gone more than 24 hours without mentioning the fact that we got a 400 point drop in the Dow in a single day. Since I’m a long term investor and not a trader, the events of this week really aren’t all that important to me. I really didn’t do much of anything on Tuesday other than just sit back and watch the television screen after it became apparent that something was happening that we don’t see every day.

So, why haven’t I been very active in the market this week, and what do I think about the whole thing? First, while four hundred points sounds like a lot, in the whole grand scheme of things, it isn’t. From peak to trough, intraday, we saw a 5% drop in the S&P 500 over three trading days, which is pretty substantial, I admit. However, if you use closing prices it was less than that, and if you include Wednesday’s snap back rally, it was even less than that. Currently, the S&P 500 sits 3.7% below the highs it made in February. To me, this is much to do about nothing. If we had gotten a 3.7& drop over the course of a month or two, few people would think anything of it.

Let’s take a step back and put the drop in perspective. I began to get a little cautious when the S&P 500 crossed 1,400 because I thought the market was overbought. However, it kept going up, rising another 4% within weeks. Even with this 3.7% “correction” (I’m hesitant to say that it is over) the S&P 500 is still above 1,400. So, I don’t really think this pullback has been big enough to warrant putting every cent of cash to work. We just haven’t retraced enough of the gains for me to be optimistic that the smoke has cleared, hence I am not all too enthused about the market’s short to intermediate term prospects.

If the sell-off continues, which I suspect it might, then I will likely do some buying. I’d say we would need another 3% to 5% downside from here for me to get to that point. If we instead rally right back up to the highs, then my same overbought worries will persist and I will likely take some money off of the table to save up for a rainy day, or the next 400 point fiasco.

To sum up, I really don’t think too much has changed despite this week’s events. The market is still up a lot and even with the pullback, I still don’t think we are going to see double digit returns this year. It would still take a more typical market correction for me to get aggressive on the long side, so right now I’m really just focusing on individual companies in this environment.

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