Because Every Now And Then The Market Goes Down


I am writing this post Wednesday night from the South Rim of the Grand Canyon. Before dinner I popped into the Fire Center to take some pictures of their apparatus and also learned a little about technical rescue and extrication from one of the guys on duty to take back to my colleagues at Walker Fire where I volunteer.

The market has endured a noticeable decline over the last few days including better than 3% today. Is this it, is it time to worry, should we be selling out? My answers are that this could be it but I don't know, it is never time to worry because while the stock market goes up the vast majority of the time it does go down now and then and sometimes those declines scare the hell out of people. As far as whether now is the time to sell, the answer to that question is that you should stick to whatever strategy you set out on believing (when you weren't scared) was best for you.

For me, I will take more defensive action (I bought BTAL in May and it was up on Wednesday) if the S&P 500 closes below its 200 day moving average for a second consecutive day. To be clear as of Wednesday the S&P 500 was 20 points above its 200 DMA. Some people might have a strategy that involves the 50 DMA, if that's you then you should have taken some action already.

If we get a 200 DMA breach as described above I will likely add an inverse fund or something similar. That is my strategy, it is effective but not infallible but something that I have proven I can stick to. I would encourage everyone to review what they do, even if that is buy and hold on no matter what, to see if they can honestly say the same about their strategy especially proving to themselves that they can stick with it.

I have opinions about what the market will do but anyone whose been along for the ride with me since the beginning of my blog knows that any opinions I have take a back seat to my investment process. My process doesn't involve guessing what the market will do, it involves moving slowly to protect the portfolio knowing that on headfakes it may not be ideal like with buying BTAL. I had believed the 2% rule had been invoked so I sold one stock that was up a ton in a few months and bought BTAL. BTAL has actually gone up some since I bought it but even if it had gone down, it was a small tweak; clients remained plenty long. For anyone new, bear markets tend to rollover slowly over a period of months which means you can take defensive action slowly in case you turn out to be wrong.

Recently I conceded that the BTAL trade was probably wrong but now I am not so sure. I've been concerned about the cycle coming to an end for a while and for all I know, that is starting, maybe the last six months has been a huge topping process. Again, right or wrong does not matter, all that matters is your process and sticking to it.

If you are concerned your process might be flawed, the time to do something about it is when you're feeling good about the market not when you're worried. If a bear market is starting and you end up not doing as well through as you think you should, you know that if nothing else, time will bail you out. As I say very frequently, all bear markets are the same; the market falls a lot and scares the hell out of a lot of people, then it stops going down and then it goes on to make a new high. The only variable is how long that all takes.

Once the market is back strong again and you're back to feeling good; then reevaluate to decide whether you really need to make any changes. Chances are you don't.