On Feb. 29, 2020, I argued that “the stock market correction was overdue irrespective of the coronavirus and is nothing to fear.” At the time, U.S. equities had lost more than $3.18 trillion in the worst weekly sell-off since the 2008 financial crisis.
“Should you divest yourself of all stocks and hide your money under the mattress until the panic subsides? No, of course not,” I wrote. “Stock market corrections occur with some regularity and are to be expected.”
Since then, of course, the market has continued to crater. Why? Because the U.S. economy is shutting down as a result of the coronavirus. Thus a healthy and inevitable market pullback has now been exacerbated in the extreme by a “black swan” event that traders did not foresee.
It happens, or at least it happened. The question now is: what should you do?
History Lesson. Well, first off, let’s learn from history, so that we don’t repeat the same mistake next time the market skyrockets.
A sage bit of investing advice says: “Bulls make money; bears make money; but pigs get slaughtered.” For this reason, it is always a good idea to take some of money off of the table, or out of the market, after a big bull run.
We noted here at ResCon1 that, just before late Feb. sell-off,
the major stock indexes—the SPY, QQQ, and DIA, for instance—had all hit 52-week highs.
The market had been climbing higher and higher almost without interruption for some time. We were due for a pullback. It was inevitable.
For this reason, cashing in at least in part after the market indexes hit 52-week highs on the strength of a long and sustained bull run would have been the wise and prudent thing to do.
That’s Investing 101. But if you failed to do that, don’t fret or worry. You are where you are and time can heal all financial wounds.
In truth, it is exceedingly difficult to predict a market bottom. However, the market has dropped so far so fast that there is good reason to think we may have hit a bottom, if not the bottom. So now may be a good time to begin buying stocks again.
Investor Bill Miller, for instance, told CNBC that “this is an exceptional buying opportunity.
“There have been four great buying opportunities in my adult lifetime,” he said.
“The first was in 1973 and ’74, the second was in 1982, the third was in 1987 and the fourth was in 2008 and 2009. And this is the fifth one.”
Miller said these historic opportunities were mainly event-driven.
In 1973, there was the Yom Kippur War in the Middle East. A severe recession crashed the U.S. economy in 1982. There was a dramatic, albeit short-lived, stock market crash in 1987. And of course, in 2008 and 2009 there was the Great Recession.
“Those are the sorts of events that you see when markets are making historic lows. The news is just bleak all around,” Miller added.
Miller, CNBC’s Maggie Fitzgerald reports, is
chairman and chief investment officer of Miller Value Partners… [He] beat the market for 15 straight years while working at Legg Mason…
[His] firm posted a return of 119.5% last year net of fees… Those gains more than made up for the firm’s 33.8% loss in 2018.”
Moreover, CNBC’s Brian Sullivan observes that, according to InsiderScore.com, corporate executives have “started buying their own company’s stock either at, or nearly at, record levels.” Last week, for instance,
more than 1,300 top executives got into the market. Small caps, energy, financial company executives—they [all] had more buyers than at any time in their history, even more than at the depths of the [2008] financial crisis.
And insider buying across the entire market is getting close to that level as well. it is now at its highest level since November 2008…
InsiderScore.com notes that they’re not calling a market bottom. CEOs aren’t perfect market timers. But they do note CEO buying peaked in late 2008. Maybe a little good news on the market front.
Indeed, CNBC’s Jim Cramer thinks the doom and gloom about the U.S. economy and the markets is excessive and overwrought.
“Given the beating the market’s taken over the last couple of months, I think this it the wrong time to go full doom and gloom,” he said tonight on Mad Money.
I know the situation [with the U.S. economy] will get worse, probably a lot worse, before it gets better; but it will get better. And sometimes the stocks reflect that before we get to where it gets better.
We’re not some pitiless, helpless giant that’s powerless in the face of this pandemic…
The 1987 crash turned out to be a fabulous buying opportunity, not a selling opportunity. It could happen again.”
Williams Indicators. Cramer observes that, according to the legendary market technician, Larry Williams, the market has hit an extreme panic level. This is “the single most reliable indicator of a trend shift from bearish to bullish that there is.”
Cramer quotes Williams:
None of the tools of the trade that I have in my arsenal have done this good a job of calling major stock market lows. For almost 90 years we have seen bull markets begin at these times of extreme panic.
According to Williams, there have been 24 “extreme panic” signals in the last 87 years, and 18 of these 24 times the market has bottomed within three weeks. In 16 of these 24 times the market has bottomed within one week.
Cramer finds Williams’ analysis convincing and says that he likes these odds.
On the other hand, as Fast Money analyst Dan Nathan points out, there typically are “fierce bear market rallies off of lows.”
In 2001, he says, there were two 20 percent rallies that failed before we made new lows. In 2002 there was a failed 20 percent rally that gave way to a new low. And, in 2008, there was similar price action.
“It took two years,” Nathan says, “for the market to bottom.”
Nathan acknowledges that this latest downturn is notable for its speed and velocity. Still, he says, it will take some time for the market to bottom.
So, if you’re buying now, understand that there likely will be lower lows, and be “comfortable with further losses,” he says.
The bottom line: know yourself. Know your appetite and tolerance for risk and act accordingly.
Realize that while no one can foresee the future, our investment decisions should, nonetheless, be guided by historical experience: because there are clear and discernible patterns that repeat themselves in the market each and every day, week, month, year, and decade.
Thus it is OK to take money out of the market when new highs are reached, and it is OK to reinvest when new lows are plumbed. It also is OK to make short-term trades rather than long-term investments.
You do not, after all, want to be the passive victim of financial conditions, market downturns, and “black swan” events.
Instead, you want to take (financial) advantage of market conditions and market-moving events, and now may be an especially good time to begin doing so.
Feature photo credit: Jim Cramer in Rocket News.