I’m all about making a lot of money in our changing world. There are so many outstanding companies and opportunities out there, and our NexGen system brings together fundamentals, technicals and intangibles to lead us to the best of them – companies that are leading the way in unstoppable mega-trends reshaping our world.
Almost every aspect of our lives is impacted by new and improved ways of doing things, be it the next technology revolution, medical breakthroughs, next-gen energy or anything else. Investing is impacted as well. Most of the time this means the huge money-making opportunities we all love, but the last few weeks have shown us the other side. The volatility we’ve seen of late reinforces what I’ve noticed before, which is that the market’s way of correcting is different than it used to be. Think of it as the next generation of corrections.
Let me explain what I mean, and we’ll also talk about what investors need to understand in order to avoid making big mistakes.
Same Depth, Different Speed
I’m a big market historian, and part of understanding where we’re going is also understanding where we’re coming from. Going back to 1950, the typical market correction involves a roughly 13% pullback from a high. It used to take a few months for the correction to play out from the top to the bottom, followed by another three months to get back to the previous high.
In a period of just two weeks, which ended last Friday, we saw an 11.8% pullback. That’s almost the same amount as other corrections, but the big difference is that it happened in a fraction of the typical time. It was a wild ride, but you should get used to withstanding big moves in a short period of time – I believe the quick and violent correction we just experienced is the new normal.
Take a look at the last three corrections on the S&P 500, as shown on the chart below. They were in late 2015, early 2016 and now early 2018. It is clear how quickly these occurred as well as – here’s the important point – how fast stocks were able to rebound.
There are two main takeaways: First, the depth of corrections is so far staying pretty true to the historical 13% average, which is important to keep in mind when we’re in the middle of one. Second, the manner in which corrections occur has changed.
Reasons for Rapid Corrections
This change in the speed of a correction is due to the evolution of the stock market. Understanding this not only makes a correction easier to endure, but it also shapes our strategy. There are several factors behind NexGen corrections to consider:
Information overload: Investors have vast amounts of information at their fingertips around the clock via their TV, computer and phone, which leads to real-time updates and faster decision making. This information is not only changing rapidly, it is also not always accurate. Unfortunately, this often leads to investors making decisions based on misleading facts as well as emotions, namely panic.
Trading accessibility: This could be considered 1A because the same devices that provide us with information overload also enable us to execute those rash, emotional decisions. When the Dow was falling hundreds of points in minutes a few weeks ago, an investor could easily take out his phone and sell everything he has as he eats his lunch.
Identity crisis: This is also related to the digital age with constantly updating information at our fingertips. Years ago, investors regularly put money into a brokerage account and continued to invest in solid companies to grow their money over time. I’m not saying Wall Street firms were the greatest way to invest that money, but there was a patience that existed in the days when you got stock quotes from the morning newspaper.
Today, investors are much more likely to turn into traders – and not necessarily smart ones – when volatility increases. Instead of holding for the longer term and even buying on dips, too many people now sell and try to time the market. I am not saying opportune trading cannot be done. I rely on charts for when to buy and sell, especially in my trading, but when you’re talking about broad-based market timing, it is extremely difficult to time the sell and then also when to get back into the market. This leads to more sellers when stocks start to fall from highs, which accelerates the downward action. Then those same sellers often sit and wait, which is why so many people missed out on the incredible gains of the last two years.
Exchange-Traded Funds (ETFs): Now we’re getting a little bit more into changing market mechanics. I love ETFs and recommend them in my NexGen Profit Multiplier service. They are a basket of stocks, which can make them good long-term holdings in mega-trends. At the same time, they can be a contributing factor in big, quick moves in the market.
For example, if a lot of investors panic and decide to get out of the market, they will probably sell their position in SPDR S&P 500 ETF (SPY), which trades an average of more than 100 million shares each day. For context, that’s three times more than Apple (AAPL) and 20 times more than Amazon (AMZN). When people sell SPY, the company running the ETF must sell shares of the companies that make up the ETF. Selling begets selling, and we’re left with a downhill snowball effect.
Algorithms: High-frequency trading and algorithms used by hedge funds and sophisticated traders work great – that is, until they don’t. We’ve seen a lot of this lately. If a certain level is triggered on a stock or index, it can trigger sell programs at a number of large hedge funds. Here again, selling begets more selling, often without the proper analysis or context accompanying it. This selling continues until markets fall so much that a buy algorithm is triggered.
What to Do In a Correction
For these reasons and the widespread availability of technology and information, we need to expect that corrections in the future will be similar to what we’ve just seen – they’ll be faster, which makes them seem more violent even though in reality they are not. I actually prefer getting them over with quickly rather than having the selling drag out over several months.
The two main takeaways for investors are not all that new, but they’re perhaps more important than ever. The first is to not join the panic selling unless there’s a significant change in the fundamentals, technical or intangibles of a company. If there isn’t, prepare yourself for the volatility knowing that chances are your stock and the market will rebound quickly in the big picture.
The second is that you should be prepared to buy early in a steep correction because stocks may not trade at a discount for very long. That’s what I’ve been doing personally and in my investing services. We’ve bought a total of six stocks across my three services, and all six are up as I write this. There will be some more ups and downs in the near term, but by knowing what to expect in a correction and using our NexGen system to identify the best stocks to buy, I am very confident we’ll come out way ahead in the end.