Sometimes you just need to throw in the towel, take your losses and walk away. This is not one of those times.
We are now down over 7% from the highs on the S&P 500 Index and if the technicians are right there is more downside to come. How much? Let’s say 1,225-1,250 on the S&P with corresponding percentage declines in the other indexes. If they are, right we are talking about no more than 25-50 points from the bottom.
“I’ve had enough already,” moaned a client, who wanted to go to cash and sit out the rest of the decline.
He admitted that this decline, for some reason, has reminded him of the declines he experienced back in 2008-2009. He lost a lot of money with a broker back then and fears he may lose the rest. That is understandable and I’m sure that there are a number of readers who might feel the same way.
I urged him not to give in to his emotions, and reminded him that for all the down days we have experienced, the market’s pullback to date is well within the realm of a normal decline. The situation today is far better today than when we were mired in the financial crisis. The economy is growing, interest rates are at record lows and employers are hiring, instead of laying off 200-300,000 workers a month.
“But why does it feel so relentlessly negative?”
“Duration,” I explained.
This is the sixth straight week of stock market losses, which qualifies as the longest losing streak we’ve experienced since the fall of 2002. The seemingly never-ending series of down days makes one imagine that there will never be an end to these declines. It also doesn’t help that this particular client is addicted to watching the financial networks most of the day and checking his portfolio constantly.
I fully expect that before it is over all the stock averages will be in negative territory for the year. There will also be more days of downside ahead but hopefully not too many more. I’m convinced that we are very close to a bottom, both in price declines as well as the number of down days.
The facts are that we are in our third pullback this year. Each time the markets recovered and moved to an even higher level with a series of higher lows and higher highs. That is the reverse of what happened during 2008-2009. Until that changes, I’m hanging tough.
My suggestion is to stop stressing over the markets. Remember folks, these are paper losses until you sell. In this market, losses have turned into gains in a blink of the eye. If you sell now and the market turns higher in another day or two, what will you do?
Will you chase the market only to discover that it was a false rally? Will you sell and then try to pick the bottom? What if you are wrong?
Selling to stop the pain is not the answer. Instead, step back a bit, take a deep breath and have some faith that the markets are still in an uptrend. The second half of this year will be better than the first. Remember that last year, all the gains in the market were made in the last four months of the year and they were substantial. That could happen again. Since you have already endured most of the pain, why not wait around for the gains?