Markets Got You Down? Technically, They Shouldn’t!

 

 North American Markets

In February, we got a wakeup call. The S&P/TSX Composite dropped about 8.5% and the S&P500 dropped just over 10%. These markets have rallied back about 50% from the selloff.

 Despite all this, Technical Analysts note that looking at recent “internals” they see that NYSE breadth ratios were not nearly as heavily one-sided bearish as they previously were, total volume was lighter, the VIX index is now well below its high, and the number of individual stocks making 52-week new lows on the NYSE was less than half of previous readings. The data is getting better, not worse. This is exactly what we’d expect to see during a bottoming process. i.e. a decline in a day is likely an aftershock, not another earthquake.

What to do?  

There are a few things every investor should always be aware of, not just when the markets are chaotic and gut-wrenching.

  • What is the history of your strategy through both the good and the bad times? If the good far outweighs the bad, then relax.  If you don’t know, then likely the uncertainty of what could happen may justify some insomnia.  Check out the volatility in the chart of the S&P/TSX Composite below. Compare both directions of the volatility. The index lost between 22% and 25% between March and September in 2011, and about the same between August 2014 and January 2016.  Not as dramatic as the correction in 2008/09 where it dropped about 50%. Ultimately it is our behavior around these dramatic events that dictates our results far more than the market itself.
  • The right behavior? If volatility can be similar both on the way up as down, there is logic to simply putting up with the chaos. Panic selling can often be the worst behavior. If you do sell, you now have another decision to make – when to reinvest? Because Tycuda’ s stock strategies will move either progressively or aggressively to cash in certain economic environments, we have historically limited the downside. Then, when reinvesting, we are investing in the stocks and sectors that are showing the most potential, so recoveries have often outpaced the markets over the following years. We trademarked the term Risk, Return and Recovery™ (3R’s) as a way of comparing the quality and performance of investments to one another so we can have evidence of how making better decisions works out.
  • If the markets fall, and you have other money to invest, do what most won’t – buy! Whether it be new money or other money in your account, like bonds that can be sold and reinvested.  Historically, the further the stock market falls, the less risk there is in adding more capital, and not only will you have higher long-term return potential, but the returns come sooner because you have lowered the cost of your investments. As mentioned, having the courage to add more money to what has historically proven to be a good strategy when it is down, is a behavior worth its weight in gold.  If you have this discipline, then you have another important piece of the investment puzzle.
  • How to keep calm? If you know you have a good investment strategy as mentioned above, then you know pullbacks in the market are a buying opportunity. Remember also that you likely built your portfolio with many years of contributions. And likely plan on taking money out of your investments over many years, not all at once.  Corrections are typically violent, but relatively short-lived compared to the growth periods.  Don’t let short-term events hurt your long-term plans.
 
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Don’t lose focus on the two factors that will determine a very large percent of your success; having the right strategy along with the right attitude.  Don’t let lack of knowledge or emotions limit your future.