The Next 1000-Point Down Day Is Coming
Before the Monday, Aug. 24, thousand-point down day, I warned readers of my investment letter to be ready for the market to correct, quite possibly via an “elevator drop” and to get ready to buy stocks on our list of attractive companies. Prior to the “mini flash crash” as I’ve heard it called, I warned here on MarketWatch that “things were getting bearish,” and “stocks were not properly priced.“ Smart investors spent the spring and summer raising cash and preparing a list of stocks and ETFs to buy when opportunities arose.
Retail investors are getting it half right, moving money out of stocks for the past year. Most have done so out of fear of the “next collapse,” as they did in early 2009 before finally reinvesting around 2012. This time, they are close to their portfolio highs from the middle 2000s and believe they should get out of the stock market before the next crash. That makes some sense, better to pre-panic than post-panic.
Investor fear, primarily among baby boomers, is probably well founded in the short-term. The world is facing serious economic headwinds driven by demographics and debts which I have covered in several columns, investor letters and recently in my monthly investor webinar. The combination of investor skepticism, a slow economy and a Federal Reserve that keeps talking tough makes it very probable that we are going to get another thousand-point down day very soon. In fact, I am pretty sure we will get two or three within the same few weeks.
How horrible will it get for the stock market? How far will emotional sellers and traders drive the markets down? Will it be the beginning of another financial collapse? Here’s what I think.
I believe fear and emotional selling will drive the stock market down into official bear-market territory, however, I have a hard time making a case for anything more than a run-of-the-mill bear market. It also seems to me that there is not enough stupid retail money left in the stock market to take it below the strong support level around 1550 on the S&P 500 for more than a week or two. For traders or those seeking a hedge, rolling put option positions on the SPDR S&P 500 SPY, +0.23% makes a lot of sense to me given those contracts are cheap and have potential large upside. (Read more from “The Next 1000-Point Down Day Is Coming” HERE)
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