It’s been a rough week-and-a-half for investors, that’s for sure. Most of what makes this correction so unnerving is its pace. This is the fastest decline into correction from a market high in history. In just six trading days, the NASDAQ lost over 12% and the S&P 500 over 10%. Both of those indexes hit all-time highs the day before the first decline. Usually, corrections of this depth take weeks to build up. This, in an of itself, is a bit of a small bright spot. The reason is that almost exclusively, bear markets – the really nasty, deep, long-lasting declines – begin very gradually. Corrections that go on to recover more quickly tend to be more violent and dramatic in their early declines, such as this has been. Of course, there is no guarantee that previous patterns will never be violated, but when we’re assessing damage in an effort to determine a course of action from the current point, relying on steady patterns of previous market behavior is helpful. History repeats itself with regard to market action.
Whenever health-related issues, such as this coronavirus outbreak, become prominent news, that too is unsettling. It doesn’t help that the media has fixated on sometimes hysterical and incorrect reporting. We guess that sells newspapers and website hits, but it doesn’t inform us properly. We saw one headline earlier this week, which stated in percentage terms, that day’s 4.4% loss was the greatest in history. That’s blatantly false. In October of 1987 the DJIA lost 508 points, but back then, that was 22.8% in one day! We did have history’s greatest DJIA point loss Monday, but that was only the 229th largest percentage loss recorded. That was edged out very slightly for the top spot yesterday. So, not as dramatic, but certainly sensational! We’re not trying to minimize this rout, but let’s be clear: we will always and forever have increasingly-more dramatic point movements – both directions – on big action days simply because the indexes have gone up so much. And, as our portfolios rise, we will always and forever have greater dollar swings as well, for the same reason. It’s the percentages that matter, especially when comparing to historical movements.
So where do we go from here? We’re maintaining that staying put, and not selling into this weakness, will reward patient investors. Nothing has been reported negatively about the economy itself to alter our assessment of strong underlying fundamentals. The VIX volatility gauge has surged more than 20% above its 10-day moving average, and is more than 68% above its 10-day line, indicating the fear in this stock market is severe. The put-call volume ratio hit 1.21, above the key 1.15 level for the first time since early October. A reading above 1.15 can help confirm a low in the S&P 500 and Nasdaq. This market has gotten oversold on fear. Keep in mind the VIX and the put-call ratio are secondary indicators, and don’t take precedence over the price and volume action of the indexes. But they indicate extreme fear and panic selling. And, they’ve been quite accurate in finding bottoms. We don’t know how much lower this will go, or how long it will be before a new uptrend resumes. But over the decades we’ve been in very similar situations many times, and we’ve proven over and over that keeping cool is an investor’s ally.
While it may seem scary or even crazy, we all know the recipe for investing success is to “buy low and sell high”. This requires that we have the presence of mind and courage to actually invest when markets are low. And when are markets low? When bad, scary news has driven them down, that’s when. Our most experienced clients are contacting us about adding to their accounts. Infusions of cash at times like this allows us to practice the above-mentioned strategy. We can’t invest cash we don’t have in client accounts. On the other hand, as our clients well know, we never put new money to work in weak markets with bad technical indicators. We are in a technical correction. We will sit on any new cash until we launch into a new confirmed uptrend. But cash must be on hand then. So, if you’re inclined, now is the time to arrange for deposits into accounts.