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S&P 500 down almost 50 points, DOW down more than 400 points! Time to buy? Not yet.

I think we are hitting a true bear market here. For more than 5 years we haven’t seen such selling. Some even say that they do not remember such volatility and drops, so that must have happened long time ago.

It is not usual to see markets falling this much. Look at it from a perspective of a standard technical analysis we are taught in every book or by every trader. It goes that trends move in steps, creating higher highs and higher lows in uptrend and lower highs and lower lows in downtrends.

In a 5 year chart this is still true, but if you look at 6 months daily chart the market falls down as a rock.

When did you see last time markets falling by 30 – 50 points (S&P 500) or 200 – 400 points (DOW) every day?

Well some traders I know off and talking heads are mentioning “capitulation”. Are we really seeing it? If so, we will see a slump and bottom of the market soon.

Is this a time to buy stocks?

As a dividend investor, this is a great opportunity to buy stocks cheaper as now they are on sale. There are two ways you can deal with the market.

  1. Dollar cost averaging.
  2. Market timing.

Dollar cost averaging

If you do not have to deal with every day market fluctuations and panics, you already use this strategy and buying regularly every month (or any other period of time) your stocks. Now you will definitely be enjoying lower prices and benefit from the future growth.

Market timing

Here I am not referring to “fishing” for bottoms trying to buy low and later sell high. Dividend investors and long term investors do not do this anyway. I am referring to a strategy when you time your purchase of the stock and wait for your price.

I do this strategy all the time and I like it. I watch a few stocks and when I see them falling that’s the time when I start tracking them down with a contingency order. I place my buy order above the previous day high (high enough not to be triggered by day-by-day fluctuations) and track the price down. When the stock stops falling and reverses high enough to trigger your order you get in.

Sometimes it happens and the stock turns back down and continue falling. In that case I do not use all the money I plan to spend on the stock. I split it into two or three sums and repeat the process on the way down. Worked well for me so far.

Markets look ugly with a dash of ugly

Looking at the chart made the market look ugly in the morning. However, there is one thing which caught my eye and which was different from the other days.

In previous sessions we could see markets rallying in the morning and then fail heavily the last hour of the trading session. Today was different. We saw a heavy selling – ugly and very ugly selling in the morning until about noon. Then a sudden rally!

SPX Ugly

Does this mean we are bottoming? We will see in the coming days if this is just a trap, bounce, return to the mean, or a reversal. Nevertheless, markets are still in a downtrend – clear downward moving trend with no sign of reversal (although today’s trading may be a clue for a change).

If you plan buying stocks, I would still wait for a clear sign that we are really reversing. If you plan shorting stocks, wait for some bounce to add more short positions.

And what about options? I am selling call spreads towards SPX. I have two call spreads out there. One spread at 1940/1945 level and a second spread at 1930/1935 strikes. Both are set to expire worthless this Friday unless the market continues heavily rallying up to breach those levels, which is very unlikely.

Another trade I have is a put spread against Twitter (TWTR), which held ranks extremely well during this market slump. Although I am not a fan of the company and its business model, I must admit that the stock performed brilliantly.
This spread is also set to expire this Friday. It was volatile a lot the last three days and the expiration may be jeopardized. If so, I may roll the spread into the next week.
Have a great day and happy trading!

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