“It was the best of times, it was the worst of times…” – A Tale of Two Cities
Forget about it being the opening line to an all-time classic novel. It’s the perfect recap for this week’s early trading activity.
In case you were pulling a Rip Van Winkle, the Dow suffered a 634-point shellacking on Monday. Only to be followed by a monster 430-point rally on Tuesday.
Both moves were historic, earning spots on the list for the “Top 10 Worst Days” and “Top 10 Best Days,” respectively.
And that got me thinking. Is the close proximity of major market moves in opposite directions purely a coincidence?
As it turns out, not hardly!
Let’s Go to the Ticker
If we examine the top 20 biggest point moves for the Dow in either direction, an unmistakable trend surfaces.
The very worst days in the market are regularly followed by some of the very best days.
In fact, 11 of the 20 worst days for the Dow were followed by historic rallies.
What’s more, these rallies occurred within just three days of the major sell offs, on average.
And on five occasions – nearly half the time – the rallies occurred the day immediately following the sell offs.
Take a look.
This isn’t some anomaly relegated to the Dow, either. Examining the major moves in the S&P 500 Index reveals a similar phenomenon.
Case in point: Four of the 10 worst declines for the S&P were followed by historic rallies within just four days, on average.
So what are the investment implications?
Forget Shelter, Stay the Course
Considering every single stock in the S&P 500 Index fell in price on Monday, I’ll concede it’s hard to overcome the temptation to run for the hills. Specifically, to sell out of stocks completely and wait for the volatility to pass.
But don’t do it!
While the breadth of sell off was unprecedented and nerve-wracking, it was also instructive.
Consider: For all the stocks in the S&P 500 Index to fall, it means emotions, not fundamentals, must be moving the market. After all, the business prospects for 500 companies didn’t suddenly change overnight, did they? No!
And while markets can swing wildly based on emotions for a short period of time, over the long haul they move up or down based upon the underlying business prospects for each company.
Or as famous value investor, Benjamin Graham, said, “In the short run, the market is a voting machine, but in the long run it is a weighing machine.”
And unlike the last time we witnessed such wild volatility – back in 2008 – the underlying business fundamentals are good right now. (For the record, I said they were good in comparison, not perfect.)
Or as Matt Freund, Senior Vice President of Investment-Portfolio Management at USAA Investment Management Co., says, “Unlike three years ago, corporate balance sheets are healthy, liquidity is plentiful and the level of speculative investing is down dramatically.”
Bottom line: It would be wonderful to miss the worst performing days in the market. But even if we could pull off such an impossible market-timing feat, we would likely miss the best-performing days, too.
So instead of rushing for the exits after the latest bout of volatility, simply mind your trailing stops and hang on tight.
Ahead of the tape,