By Greg Guenthner, The Daily Reckoning, 2024-08-06
This post Before You Buy the Dip, Read This… appeared first on Daily Reckoning.
I was enjoying a cocktail on my neighbor's porch early Saturday night when the skies suddenly changed.
Thunder rolled in as the horizon turned an ominous shade of purple and the wind began bending the treetops. We retreated inside just a few moments later as the first raindrops fell and watched the storm unfold from the safety of the kitchen.
It was gone almost as quickly as it appeared – but the powerful storm left plenty of damage in its wake. Residents reported power outages, more than 400 downed trees, and 170 blocked roadways throughout the city.
Aside from a few short power outages, my neighborhood was spared. The only evidence in the yard were a few stray sticks and branches, which we cleaned up on Sunday afternoon before I sat down at my desk to survey the markets and prepare for the new trading week…
As you might imagine, I couldn't help but think the universe was toying with me when I saw the market begin to unravel in Japan and spread through crypto and the futures market.
Stocks were in freefall – no doubt about that.
But how long would the storm last?
Before we attempt to answer this question, let's take a minute to review how it all went down…
Japan found itself in meltdown mode as the Yen carry trade imploded and global recession fears spread. The Nikkei fell more than 12% on Monday, which the WSJ notes is its biggest drop since the 1987 crash [Editor's note: If you're interested in learning more about the Yen carry trade, check out Sean's Monday writeup].
Stocks “Hold Hands” During Down Markets
The market becomes highly correlated during drawdowns and panic events.
What does this mean?
Simply put, on the big, sweeping down days and crashes, most groups and asset classes react with similar moves.
Correlations are lower during bull markets. You'll have big winners, middling names, and laggards. Think about how the market was acting earlier this year. We have semiconductor stocks leading the market by a mile, many tech names also cruising higher (just not as much), while other sectors lagged.
That doesn't happen during sustained drawdowns. When everyone is fighting for the exits, very few areas are safe from the sellers. And I'd venture to guess that most of the visible stocks will be down about the same as the averages during these dumps, with some of the higher-flying names from the past few months taking some bigger hits.
When sentiment sours and investors become more cautious and defensive, it's that much more difficult for individual groups to outperform.
Respect the Swings
When markets suddenly get squirrely, you probably experience a strong urge to do something, anything, to right the ship.
But part of investing or trading is simply surviving. After all, you have to preserve your capital if you want to stay in the game! And since we just experienced a severe volatility spike, it's important to remember that we're probably going to see strong moves both higher and lower in this new environment.
Volatility can be your best friend or your worst enemy. If you're a longer-term investor, you have a great opportunity to start nibbling at some of your favorite companies (If you liked it at $70, you'll love it at $50, right?)
If you're a trader, you'll want to look to compress your timeframes. Yes, you can take advantage of the bigger swings. But you'll want to take profits when you can, because the market's more likely to experience back-and-forth action. Take what you can get, then move on!
As for finding the absolute bottom following a market downturn, don't forget what legendary technician Walter Deemer says: “When the time comes to buy, you won't want to.”
The post Before You Buy the Dip, Read This… appeared first on Daily Reckoning.
