My Best Tips for Dealing With a Market That Smells of Panic
With the odor of panic in the air, is it too late to sell? Here's how to handle terrible market action like this, including avoiding the easiest mistake you can make.
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If it smells and acts like a bear market, then it needs to be treated like one.
Technically, this market action doesn’t qualify as a bear market, but it feels like one, especially in growth stocks, small-caps, and technology stocks. The market opened poorly and has continued to fall straight down, with no signs of dip buying so far. The selling is so severe that it is beginning to feel "crashy."
Bitcoin-related names are being hit hard and there is no support for most of these names. Apple AAPL, Berkshire Hathaway BRK.A BRK.B, and Lilly LLY are safe havens, with breadth running two to one negative and new 12-month lows quickly expanding to over 400 names. Breadth has not been really bad lately, which is a sign of rotation taking place, but the safe havens are shifting every day.
The primary question on the minds of most traders is: “Is it too late to sell”? In many cases, it isn’t because you can always buy something back. If you have to pay a higher price to rebuy a stock that you like, that is simply the cost of insurance.
One of the hardest things about this type of action is that it has little to do with fundamentals. Stocks are sold because they are part of the indexes that are being sold. It can be particularly difficult when you are holding thinner-traded stocks that go bidless and have no support. Just because they are good values doesn’t mean that they are going to quickly find support.
The easiest mistake to make in this sort of action is to rush to buy stocks that have deep pullbacks. If you jump in too big and too fast, then it is very easy to panic sell when the anticipated bounce doesn’t develop. Leave plenty of room to buy when stocks start to recover rather than endlessly buying into a hole. If you want to buy stocks that are in freefall, then make sure you do so incrementally and slowly. Use a tight stop, and if you are stopped out, then you can try again.
Keep in mind that the biggest bounces tend to occur in the worst markets after the biggest drops. The snapback rallies can be extremely strong and often run much further than seems likely, but they are hard to time and tend to develop only when sentiment becomes extremely negative.
I have a small core position in Bitcoin in the form of IBIT that I am holding longer term. I would like to add to that position, but I’m not doing so today. The goal isn’t to try to catch the bottom. The goal is to buy when the stock has the best chance of a new uptrend. Too many traders try too hard to nail the bottom tick, which is nearly impossible to do and creates a higher level of risk.
The selling continues as I write, and there is the smell of panic in the air.
At the time of publication, Rev Shark was long IBIT.
