First of all it was a big decline. Capital B. And it was broad, affecting just about every market in the world. Bonds were just about the only market segment that did well. Even gold, normally a refuge in times of fear was down significantly yesterday.
In last month’s press release that accompanied my study of the Worst Days and Best Days in the stock market, I mentioned that the best days often follow the worst days back to back. At this writing, the stock market is just opening on Wednesday, so it is too early to tell if this pattern will hold true again today or not.
One of the few good signs yesterday was after a 300 point drop in the Dow Jones Industrial Average in only one minute (no that is not a misprint – 300 points in one minute), the market bounced strongly. In October 1987 when the market dropped 23% in one day, the bounce was what was absent so the market kept dropping. This type of bounce shows there are still buyers out there.
My work tells me there is a lot of money in the system and markets don’t normally tank when there is a lot of money around.
A surprising aspect of the sharp drop yesterday is the lack of technical warnings from the charts and graphs I study. Big declines rarely happen in isolation, but usually follow a weeks or months long general decline.
Bear markets, those every-few-year periods where the market drops 20% or more, normally don’t start this way. They are normally slow and sneak up on investors. Normal corrections in a bull market, those zigs and zags as a market moves higher are often vicious and short lived. Yesterday’s move fits into this latter category.
For the past few months we have been fully invested in all of our strategies. Now that the markets are open today (Wednesday) it looks like we are getting the bounce today that my study suggested was likely. I will take the opportunity to sell some holdings at today’s better prices because volatility like we saw yesterday can continue, and I will be reducing our exposure to these risks.
There is nothing you need to do. I just wanted to let you know my thoughts. As always if you have concerns you may call me at anytime.