Is It Time to Buy When the Stock Market Has Corrected Twice?
Whenever there’s a sell-off in the stock market, I tend to become the go-to person among my family and friends for advice.
I get questions like: “How low could the markets go?” Or, “What should I buy?” In all honestly, the list of questions is too big to mention here.
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This year, I have gotten a bunch of these sorts of phone calls twice already. Once in early 2018, and now.
In case you don’t know, key stock indices have been dropping. The Dow Jones Industrial Average, the S&P 500, and the Russell 2000 have turned negative for the year. If you look at just the charts, it seems like things could get really ugly.
So, back to the phone calls…
Is There Really Panic in the Market?
Just recently, I received a call from a close friend of mine, and I think the conversation I had with him is worth describing to my Lombardi Letter readers.
A little background: my friend works in the medical field, and he has built up massive savings over the last few years. He wants to invest for the long term and not be worried. He is new to investing and doesn’t have much exposure.
I received the call on the day that the Dow Jones dropped 600 points.
He said, “Moe, you think it’s time to buy? Stocks are crashing left, right, and center. I see a lot of value. This could be it.”
Obviously, he was referring to the old investing adage that states: “Buy when there’s blood in the streets.”
My response was very simple. I asked him, “Do you really think this is it? Just because the markets have come down a little, it’s a big opportunity?”
I continued, “You have to look at the big picture. Stock markets could go down a lot more. The absolute greatest time to buy is when there is so much uncertainty that you don’t know if the markets will even open tomorrow.”
He then asked, “But look at the major stocks, they have declined so much in so little time. Doesn’t that say there’s panic?”
I told him,
You see, in times when there’s panic, you see a sea of red in the markets. What we saw recently in the markets hinted that investors could be waking up. Over the past few years, they didn’t have to do much. Now, they actually have to look. They used to be able to make money regardless. It’s much different now. In 2018, stock markets have seen about two corrections. We haven’t had that in past few years.
Where’s the Stock Market Headed Next?
“What’s next?” asked my friend.
I replied, “The recent sell-off may have created some trading opportunities, but I don’t think it’s over just yet. Stock markets could be headed much lower. Too many things suggest that a bigger sell-off is ahead, rather than a rally.”
He then asked, “Why would that be?”
I answered,
As it stands, we are seeing the volatility index remain at an elevated level, gold prices finding some support, and the U.S. dollar catching a bid. All these things indicate there’s nervousness in the markets, and nervousness is not good. It’s anyone’s guess when the nervousness turns into panic selling. But this sell-off may be far from a buying opportunity for the long term. It could be one of the many that are ahead.
I added, “Remember, when trading ranges become bigger, as we have been seeing these days, it says that investors have become indecisive. This is not good. The Dow Jones moving 600 points one day and then shooting up 450 points another day does not say confidence.”
