Terrified of a Market Crash? Read This First…
The kids aren’t even back in school yet. But the summer is already finished.
The news is always filled with violence and uncertainty. But right now, a deluge of negative press is bubbling up from the depths of all corners of the globe and bursting onto the front page of your local newspaper.
Terrorism. The threat of nuclear war. A divided country hopelessly searching for its political center. It’s all playing out in real time.
While we can’t offer any constructive solutions to the world’s endless problems right now, we can count on the markets to help show us how nervous the investing public is feeling.
Just last week, we said that a small pullback could induce some serious short-term panic. A record-setting quiet streak from the market has lulled many investors to sleep. Traders are quick to forget the pain of a drawdown. As the market has started to slip this month, we’re already seeing signs of panic.
You don’t have to dig very deep to see just how freaked out investors are getting over last week’s tumble.
I took this screenshot of the top headlines populating the MarketWatch homepage over the weekend:
This is our universe right now: Doom, gloom and disaster as far as the eye can see. The media’s constant war-mongering over the past week gives any investor a great excuse to sell.
Keep in mind, the panic we’ve seen recently is the investing public’s reaction as the S&P 500 is down less than 2% from its all-time closing highs. If you bought the market via an index fund in mid-July, your position is still profitable. But folks are treating this month’s action like an actual market crash.
The herd is clearly spooked. In fact, we’re already starting to see signs of profit taking in some of the market’s hottest sectors.
“Investors sold more than $1 billion in tech stocks last week, the biggest offloading since January 2016, according to client data compiled by Bank of America Merrill Lynch,” Business Insider reports. “BAML notes that the majority of the sales came from private clients, which means that there could be untapped selling pressure building in the institutional ranks, where a significant portion of holdings lie.”
Will we see additional selling in the red-hot tech sector?
It’s a distinct possibility. Tech stocks are arguably the most crowded trade on the market right now. Investors are sitting on incredible gains that have piled up without a single meaningful dip for the past eight months.
Even the strongest trends need to face important market tests like the one that’s developing in the tech sector. You shouldn’t fear pullbacks. In fact, you need to embrace a little chaos in the markets.
If we continue to see selling in tech stocks, the market will reveal information that could be critical to your next profitable trade. We can begin to get a better idea of where institutional support lies as the pullback develops and weak hands head for the exits. As emotional traders take losses, we can put dry powder to work without chasing overbought stocks.
It’s been a slow, easy summer for investors. Vacation is now over. It’s time to man the trading turrets.
Remember, the S&P 500 hasn’t posted a 5% pullback in more than a year. A little countertrend action isn’t the end of the world. In fact, it’s nothing but a great opportunity to prepare for your next winning trade…