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How the Market Works


Posted by kdadmin on October 23rd, 2014.

Fittingly, it’s been a wicked two weeks in the October earnings season. I’ve heard or read everything from “it’s the end of the market as we know it” to “it’s the second coming.”
But, like I told you all along the way, this was a time of opportunity. At its low point, the market wiped out all of its gains for a year. Just when things looked their emotional bleakest, investors were jolted back to reality with the lowest unemployment rate in six years and some reassuring commentary from the Fed. So, they began to buy back in. In one week, we’re now back up by nearly 8% (in the S&P).

In other words, just as quickly as it started, “the crisis” is nearly over. Take a look at the following chart. Notice anything about how the market moves in times of crisis? Right, each “crisis” usually takes a month to run its course, pushing the market down 7-10% from it’s high, hits its low point at two weeks in, and normally resolves itself two weeks later. Of course, past performance is no guarantee of future results. But, it’s a nice reference point to the emotional nature of traders and the financial media.


Speaking of which; wonderfully, the day a well known talking head on Yahoo Finance said that the market dip was NOT a buying opportunity and that newbies should beware, was the day the market began to recover. HILARIOUS. He couldn’t have been more wrong.

So what have we learned? The market is prone to October fits of volatility during times of social (ebola), political (Russia, Ukraine, Euro Zone), and economic (earnings season) unrest. This is nothing new.

On the other hand, the INSANE level of emotion hitched to even a tiny whiff of Fed action is very dangerous. The Fed has become the Oxycontin of economic policy.

As such, though I added to our holdings at the recent sale prices, we are not by any means “all in.” I prefer to hold a nice cash stake for the next “crisis” buying opportunity.


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