You Survived the February Drop. Now What?

Another day, another late afternoon stock market dump.

The major averages careened into the close for the second day in a row on Wednesday. The Dow led the retreat, shedding 380 points for a 1.5% loss. The S&P 500 and Nasdaq Composite weren’t far behind, posting losses of 1.1% and 0.8%, respectively.

The two-day drop was a fitting end to the market’s most tumultuous trading month since January 2016. The carefree trading days of last year are officially over. Volatility is back in town as the bears fight for a little traction heading into the new trading month.

“It’s testament to how rough stocks had it in February that the last two days, a stretch that would’ve qualified as the worst selloff in all of 2017, barely shows up in a monthly graph,” Bloomberg notes.

Everyone’s been talking about the return of market volatility. But this chart of the S&P’s daily trading range going back to the beginning of 2017 puts it all in perspective.  You can clearly see the change in the market’s character this year:

As the market streaked higher back in January, we mentioned that when stocks finally tank, no one will be ready for it.

When the sharp pullback finally materialized, most folks sold into the panic. Bloomberg notes that investors pulled a record $17.4 billion from the SPDR S&P 500 ETF as the market plummeted in early February. When volatility stormed back into the markets, everyone sold out.

Despite the panic portrayed in the financial media, what we saw in February is normal stock market action. Stocks are supposed to go down sometimes. Remember, the volatility index had trended toward historic lows for the better part of the past two years. Every spike in volatility was followed by lower lows. But this February’s market shock rocketed the VIX into the stratosphere.

The market’s “fear gauge” officially put investors on edge. Now that its inching higher again, everyone’s concerned that the next leg lower is beginning.

Is a test of the February lows possible?

Of course!

We just enjoyed a relief rally that gobbled up most of last month’s big drop. Stocks shot straight up during the second half of February without virtually no consolidation. Volatility works both ways. The market’s not going to make it easy for the bulls or the bears.

Our mission here at Rude HQ hasn’t changed (even though the market clearly has): We’ll continue to stay focused and explore ways to exploit these new volatile conditions for gains.

For long-term investors, a double-digit correction is a great opportunity to add to positions and even grab onto a stock you might have missed out on during the bull market. Remember, most investors could only dream of a pullback that could offer a rare buying opportunity while everyone else is running for cover.

For our short-term trading portfolio, we want to stick with strength. So far, the sectors that were performing well before the pullback were also the strongest names during the rally that followed. Technology stocks have been especially resilient, specifically the popular tech giants and semiconductors. All but one of our open February trades come from the tech sector. The market’s not in a forgiving mood — so we aren’t in a rush to make any wild bets.

Futures are pointing to a lower open this morning, so March trading is already off to a rocky start. With the Dow and S&P both dancing around their respective 50-day moving averages, the next few days should show us whether the bulls or bears are ready to take control…

Sincerely,

Greg Guenthner
for The Daily Reckoning

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Greg Guenthner

Greg Guenthner, CMT, is the editor of The Rude Awakening Pro, The Seven Figure Formula and Profit Spy. Over the past decade, Greg has helped build the small-cap and technical research teams. His analysis has appeared in Forbes, Yahoo Finance, Bankrate, and countless other publications. Greg is a member of the CMT Association and holds the...

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