“Morgan Stanley’s Wilson warns investors not to buy the dip.”
“Ray Dalio: Cash on the sidelines will pour in to stem the bleeding in this market.”
On February 4, the Dow Jones Index had its largest one-day point drop in history.
At one point during the day, the index had fallen over 1,500 points. It finished down “only” 1,200—a nearly 5% drop.
As you can see from the headlines above, the talking heads on TV had mixed messages…
Morgan Stanley’s chief U.S. equity strategist Michael Wilson cautioned against buying the dip. But Ray Dalio, who runs Bridgewater, the world’s biggest hedge fund, said there was a lot of cash on the sidelines ready to buy on the break.
One guy says the market is going lower… the other says higher.
It’s no wonder investors are confused.
At Palm Beach Research Group, we didn’t break a sweat. That’s because we have a plan… and stick to it.
If you do that, it won’t matter what the talking heads say… Your portfolio will be protected whether the market goes up or down.
Have a Plan, Don’t Panic
The first thing you should do is ignore the market pundits. Listening to them doesn’t help make money.
To be honest, nobody really knows why the market dropped like it did on February 4. I’m guessing it was just a normal correction… The market had gone up too far too fast. And nothing goes up in a straight line forever.
The next thing to do is make sure you have a rational investing plan… That will help you avoid making emotional sales.
For example, anyone who panicked and sold stocks at the market open on February 5 missed out on a 7% move to the upside by close that day.
In other words, the market made back almost the entire loss from the previous day!
At the Palm Beach Research Group, we use trailing stops to keep us from making emotional sales.
A “trailing” stop is a stop loss that automatically adjusts higher as the value of the underlying stock climbs. Then it stays pinned to the highest price.
To explain this, let’s use an example…
Let’s say we’re looking to buy Apple today. Apple is a large, stable company. So we’d use a 25% trailing stop loss. That should give us plenty of room for normal fluctuations in the stock’s price.
Assuming a $120 entry price, our initial stop would be $90.
As the price of Apple rises, so does our stop. If Apple goes up to $200 per share, our 25% trailing stop automatically adjusts to $150.
If Apple drops to $150 or below, that means the investing thesis changed (or a bear market has begun). Either way, it’s a sign that Apple is likely heading lower.
At that point, we’d immediately sell our shares of Apple.
As you can see from this example, trailing stops keep you in a stock that’s rising… and exits you from a stock that’s falling.
It’s very important you stick to these trailing stops… And NEVER panic-sell before the stop is hit.
When Is It Time to Sell?
Trailing stops are good for exiting individual stocks. But when is it time to exit the broad market?
There’s no tried-and-true method to time a market crash. But there are warning signs out there.
One way to read the signs is to follow technical indicators such as “trend lines.”
Drawing a line between the high and low points of a stock chart or index chart creates the trend line. It can show you key points of support and resistance.
As long as a stock or index stays above the trend line, the trend is going up. If the stock breaks below the trend line, that’s a sign it’s going down.
As you can see in the chart below, the S&P 500 is still way above its trend line.
I also follow the 170-week moving average (MA).
An MA line is just a way to smooth out the price of a stock by taking the average price over a certain period of days or weeks.
The black line below takes the average weekly price of the market over the past 170 weeks. As you can see, when the market stays above the trend line, the uptrend remains intact.
At the time of this writing, the MA line sat at 2,215. The market is still above that number. That means you shouldn’t be panicking.
Stay the course and continue holding your stocks. Don’t let little pullbacks like this scare you away.
Nick Rokke, CFA
Analyst, The Palm Beach Daily
P.S. Starting today at 5 p.m. ET, we’re running a special week-long crash series in The Palm Beach Daily. Each day, we’ll feature an essay from our top editors and analysts, including PBRG guru Teeka Tiwari. (Look for Teeka’s essay today at 5 p.m.)
Our team will show you what specific steps you need to take today to prepare for a market crash… including how to protect your hard-earned capital and what you can do to flip this into a money-making opportunity.
We’ve compiled the best advice from all the editors and analysts from across our business. These are some of the brightest minds on the planet—and every entry is timely and extremely valuable for what lies ahead.
We’re calling it The Ultimate Crisis Playbook. It will tell you everything you need to know about what’s coming. And as a courtesy to our loyal readers, we’re giving away complimentary copies of the playbook. You can download your free copy here…
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