September swoon…how low can it go?

September is normally the most volatile month for the stock market.  Today’s decline is a confirmation of that notorious reputation.  This pullback should come as no surprise, the market has gotten overheated to near levels of irrational exuberance.  Amateur and professional investors alike have been recklessly buying into stocks with nonsensical valuations- Tesla, Zoom and Peloton to name only a few.

So how low can it go?  I have no idea.  Those that attempt to accurately pinpoint stock movements are either deluding themselves or lying to you.  At best we can only assess probabilities.

I haven’t purchased this dip, yet.  For now, I’m holding out to see if the retreat approaches a technical correction of near 10%, with the S&P500 around 3200. 

[ NOTE:  Before today’s drop, over half of S&P500 stocks have been in a technical correction.  The recovery has been extremely bifurcated.  Many stocks still qualify as a “value” play.  Listen to the latest podcast episode for more details-    https://www.wealthsteading.com/316    ]

I don’t know if I’ll have the patience to wait for a 15% drop, roughly 3000.  At that level, the S&P500 would rest at “fair value” given estimated earnings for next year.  I would consider that an excellent long term entry point.  It’s also probable, given a VIX above 30 and election uncertainly. 

The panic of a flu season induced COVID 2nd wave could result in a 20% correction.   [ see chart ]

So…my advice is assess the probabilities, pick a value that you’re comfortable with, and if the drawdown materializes, buy the dip.  I remain optimistic that after the election, regardless of the winner, the markets will rally into 2021…driven by low interest rates, easy FED monetary policy, continued stimulus, and benign corporate profit targets.

HEY, if you missed my recent short format YouTube videos, please check them out:

Do you find these ALERTs informative?  Please share them with a likeminded friend.

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Simultaneous Fear & Greed

During my many decades as an investor, I’ve seen extremes of Fear or Greed, but I don’t recall a market that was characterized simultaneously by both.  That’s exactly where market conditions are now.

FEAR:  People are deeply mired in anxiety over health effects of COVID or side effects to the economy.

GREED:  People are exuberantly trying to ride the increasing wave of stock prices.

It’s been my experience that manias don’t end well, resulting in a market that changes trend due to exhaustion.  With Fear & Greed at simultaneous extremes, I suspect we’re headed for even more drastic market turbulence.

HOWEVER…markets always right themselves.  Note the chart of the Hang Seng index during the SARS outbreak that devastated the Hong Kong economy in 2003.  Travel bans scuttled the island’s travel, hospitality, and real estate sectors; yet within a year later, the market was consistently making new highs.

My advice is to not be fearful or greedy.  Moderate your emotions so that you’re investing based on reason, not fad or fantasy.  Easier said than done.

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1992 Election Aftermath

The year was 1992, the incumbent president was favored to win.

The stock market had been rallying during the 4th quarter of the previous year, until it peaked on January 15.  Optimism started to fade.  The president’s popularity was declining and previous statements he’d made were now coming back to haunt him.  The Media promoted the challenging candidate’s claim that the country was experiencing the “worst economy in 50 years.”

Panic set in and the S&P 500 dropped to a low in mid-April.  It then quickly recovered, forming a “V” pattern and rallied into June.  Again, panic set in, the “V” pattern morphed into a “W” as the market dropped to nearly test the previous low.  But the panic was short lived, the market again rallied, this time setting a new high, although things remained choppy until the election. 

On November 3, the president lost, becoming only the 9th incumbent to lose reelection.  The market reacted negatively for a couple weeks. 

Over the course of the next 8 years, the market remained turbulent, sometimes impulsively volatile.  But as the economy adapted to the seismic megatrends and shifts in demographics, society, and technology…the stock market ultimately rallied to become one of the greatest bull markets in history.

Bookmark this page and re-read it over the coming months and years.

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Taking more profits- sold IBB & CQQQ

Encouraging news about Remdesivir’s efficacy as a COVID treatment has driven markets higher.  I used this as an opportunity to lock in some profits on two stocks that have done extremely well and are within a few percent of their record high.  With volatility still at astounding levels, I think it’s prudent to remain cautious.

Sold and closed out of:

  • Biotech ETF  IBB 
  • Chinese Tech ETF  CQQQ

I was especially anxious to part with CQQQ.  Chinese stocks have been rocketing lately, adding more than $1 trillion dollars in market capitalization just this week.  Sure they can go higher, but as they say in Wuhan: A chloroquine dose today is worth a vaccine in the future.

FYI- watch for the next episode of the Wealthsteading Podcast where I’ll celebrate our 6th Anniversary with a survival story about my Grandfather.

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Market staggers along…downturn could occur SUDDENLY

The Market has once again shown resilience and recovered half of last week’s losses.  Whether it moves up or down is anyone’s guess.  I’m not being facetious when I say that forecasting conditions are in a “flip a coin” mode.  While the market has been displaying extreme resilience over the past few months, the price-action has been less than supportive.  In recent weeks, selling volume on down days has been much higher than on up days.

So while the S&P 500 remains range bound (fluctuating between 3000-3200), I remain prudently cautious.  Should investor sentiment degrade, market conditions could deteriorate rapidly. 

Note the attached chart.  When COVID fear solidified on March 4, it took only two weeks for the Market to drop over 28%.  The S&P 500 is currently staggering back at those levels. If the 200 day moving average (dma) doesn’t provide support, then a ~10% drop is likely (2700-2800 range).

Will the 200dma hold?  Flip a coin.

For additional commentary, please listen to today’s episode of the Wealthsteading Podcast:  https://www.wealthsteading.com/314

FYI- July 4th is the Wealthsteading Podcast’s sixth anniversary.  Be sure to tune in for a review of the 10 Wealth Building Principles.  Let me know if there are some additional topics that you’d like discussed during our anniversary celebration.

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