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Market Crash: But Not Yet a Correction

Posted by kdadmin on August 21st, 2015.

Market Crash: But Not Yet a Correction

Today, the market experienced its worst one day sell off since October, 2008. The S&P 500, represented by SPY, has plummeted nearly 6% in two days. In fact, it’s 7.43% off its recent market high; only 0.20% percentage points off the drop in October, 2014. Remember what that was like?

If you read my blog about gold this morning (All That Glitters is Not Gold), you know that the blue line is the money market fund (cash) known as CMR. CMR is the true safe haven. Notice what happened to it today. Nothing. This sort of volatility is exactly why we sold our SPY position in late May, 2015.

SPY hasn’t been this low since October 27, 2014. Yikes.

I draw your attention to this market crash for two reasons.

  1. To underscore what a safe haven actually looks like in a time of wild market movements.
  2. To remind you that with great fear comes great opportunity.

Back in October, 2014, I talked about CNN’s Fear and Greed Index. This “indicator” tries to measure the emotional sentiment on a continuum over the market’s two emotions, fear and greed. It’s actually a composite of several other indicators. I like to use it here because it’s accessible to the less geeky. When I wrote the post, Hunt the Black Swan on October 14, 2014, the Fear and Greed Index registered a score of one. Meaning, the emotional sentiment was as terrified as it could be. If you look on the chart above, you’ll notice what happened shortly thereafter. People got over themselves, remembered that the economy was strong, that Ebola was not going to wipe out the world, and they they could probably deal with the end of the Fed’s QE3. And, the market went right back up.

But only those who had the stones and the vision to buy in during the October, 2014 drop (see my blog post, Wicked),made the extra spiff that this opportunity provided.

Now, the market and the economy are not at all in the same place as they were last October, and past performance is no guarantee of future results. But, have a look at today’s Fear and Greed Index below. What’s the current score? Five.

Fear & Greed

To be fair, I don’t think now is the time to buy back in for the long term, as there are still significantly distressing issues on the docket this fall. While you short term traders may make a little money, it’s extremely dangerous out there. Of particular concern are the Federal Reserve’s change in rates and the October earnings season. The issues with global terrorism aren’t going to help, nor is the flat lining unemployment rate. But there will be a time when it will be prudent to get back in, and this whallop is your cue to pay attention.

If you still have a significant portion of your assets in stocks at this point, or even bonds, it’s probably not the end of the world. Yet. But doing so means that you will have to make up a significant loss BEFORE you can start making money again. It’s more effective to be out while the market goes down, and to buy back in near the bottom. I know this is obvious, but it takes discipline to make it happen. Discipline that few amateurs have.

One last thing, for those of you out there who are bummed that money markets funds (cash) pay little to nothing, consider whatthat blue line aboveoffers in a volatile market, or even in a market crash. Security. I will take 0% over -7% any day of the week. Won’t you?


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