Ignore the Hype. Ask the Right Questions.
Everybody was buzzing about the 315 point drop in the DJIA today. They noted that it closed out the worst week for that index since September of 2011. The S&P 500 joined the party, falling almost 33 points while suffering its largest weekly loss since May of 2012.
Reports like the Wall Street Journal’s (shown below) were meant to grab attention. So what if the headline scares typical investors? Page views and TV ratings are what are important in our modern day world.
Put the noted percentage drops into perspective and you’d realize that the day’s decline in the Dow Jones Industrials was equivalent to a $10 stock dropping 18-cents. For the Standard & Poors index it would equate to 16-cents. OMG!
The WSJ’s article implies that this must be a terrible time to be invested.
Note: You cannot buy the indices directly but you can own ETFs designed to mimic their performance.
Should investors be worried by poor technical action?
To answer that question I created charts for the DJIA ETF (DIA, Financial) from September, 2011, and for the S&P 500 ETF (SPY, Financial) since May 2012.
Were those moments risky, get-me-out-of-stocks, periods or were they times you should have been happy to get or stay invested?
Take a look at the historical results since those dates and decide for yourself.
The S&P 500 ETF looks quite similar to the DJIA since the May 2012, week referenced by the WSJ. The near-term volatility in 2012 gave smart traders the chance to buy cheaply from those who were induced to sell, simply because prices were getting temporarily worse.
Viewed with a wide-angle lens, this week’s sell-off barely registers as noteworthy. The S&P 500 suffered thirteen 5% or greater pullbacks since the current bull market began on March 9, 2009.
100% of those retracements led to new all-time highs within months.
Betting against history has always been a losing proposition. Fighting a 13 out of 13 track record is for long shot players only. In fact, every bear market in American stock market history has been simply a pit stop on the way to further gains.
Turn off the business channel. Take a walk. Have a drink and relax. You’ve got the rest of the weekend to research some great stocks to buy while panicky people are busy dumping.
Disclosure: I hold lots of stocks but own no index products. I was a buyer of shares and a seller of puts during today's session.
