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A Roadmap for Traders

By Larsen Kusick, analyst, Phase 1 Investor
Tuesday, August 9, 2011

This panic we're seeing on Wall Street is nothing new.
 
We've seen this all before. And nine out of 10 times, you want to buy stocks right now.
 
Consider the following... 
 
The S&P 500 is down 13% in the last week.
 
Going back to 1971, the S&P 500 has dropped more than 10% in a five-day span 10 times – not including the current slump.
 
I went back and took a look each of these 10 sharp drops... and then checked to see how the S&P 500 did in the six months following the selloff.
 
(In some cases, multiple days in a row could have counted as being "down 10% for the week." In these instances, I only used the first day following the drop, which gave me more conservative results.)
 
Here's what I found... 
 
Date
% Decline
Performance Over Next 6 Months
2/23/2009
-10.1%
38.0%
11/20/2008
-17.4%
21.0%
11/11/2008
-10.6%
-0.7%
10/27/2008
-13.9%
2.9%
10/7/2008
-14.6%
-17.2%
7/22/2002
-10.7%
8.3%
9/21/2001
-11.6%
17.2%
4/14/2000
-10.5%
1.3%
8/31/1998
-12.0%
28.2%
10/19/1987
-27.3%
14.7%
average
-13.9%
11.4%
 
As you can see, investors who bought stocks after the selloffs averaged a gain of 11.4% over the next six months. In fact, investors lost more than 1% over the next six months only once (10% of the time).
 
That one extended selloff happened in October 2008: Six months later was April 2009, near the bottom of the crisis. Investors who held for a few more months made out just fine that time, too.
 
The lesson is that patience wins. Investors willing to step up and buy while everyone else is panicking end up making big returns by waiting for the smoke to clear.
 
If you're looking for a safe route, you can't go wrong with giant, cash-rich tech names like Intel, Apple, and Google. Pharma giant Pfizer is another stock that has given up all its gains from earlier this year... while sporting a dividend yield over 4%.
 
For speculators, there will probably be dozens of smaller, riskier stocks that end up doubling over the next year.
 
There's no guarantee it will pan out this time around... But history suggests buying stocks here is the right bet.
 
Good investing,
 
Larsen




Further Reading:

Still reluctant to put your money in the market? Find more arguments for buying stocks here:
 
When we see readings this low during bull markets, stocks have been higher three months later 87% of the time.
 
Seven decades of data tell us stocks are going to end the year higher. And the average annual gain whenever we have this setup is 22%.

In The Daily Crux
Market Notes
Gold rockets to a fresh record high above $1,700 after S&P downgrades U.S. debt.
 
Investors ignore the downgrade... push 30-year Treasurys to nine-month highs.
 
Fear index VIX surges above 40 for the first time since May 2010.
 
Gold mining stocks avoid selloff... one of the few sectors that is up over the past two months.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1119.46 -6.7% -0.2%
Oil (USO) 31.51 -7.2% -13.0%
Gold (GLD) 167.12 +3.3% +41.8%
Silver (SLV) 37.97 +1.7% +110.1%
U.S. Dollar 74.52 -1.0% -7.3%
Euro 1.42 -0.8% +6.7%
Volatility (^VIX) 48.00 +50.0% +120.8%
Gold Stocks (^HUI) 526.29 -0.2% +14.4%
10-Year Yield 2.34 -8.6% -17.0%

World ETFs
Symbol Price
Change
52-Wk
S. Korea (EWY) 53.00 -9.2% +5.5%
Taiwan (EWT) 12.81 -6.4% +2.8%
Singapore (EWS) 12.30 -7.8% +2.8%
USA (SPY) 112.26 -6.5% +1.9%
Canada (EWC) 26.88 -5.5% +1.7%
S. Africa (EZA) 59.41 -8.4% -0.1%
Japan (EWJ) 9.51 -4.8% -2.0%
Israel (ISL) 14.20 -7.9% -2.6%
Russia (TRF) 17.30 -10.1% -8.9%
Lat.America (ILF) 40.75 -8.9% -11.8%
China (FXI) 35.99 -7.2% -12.4%
India (IFN) 25.74 -7.1% -12.7%

Sector ETFs
Symbol Price
Change
52-Wk
Internet (HHH) 68.35 -5.3% +23.3%
Oil Service (OIH) 122.32 -9.9% +14.1%
Retail (PMR) 17.99 -7.1% +10.3%
Big Tech (QQQQ) 50.59 -6.0% +9.1%
Consumer Svcs (IYC) 61.89 -6.4% +7.8%
Big Pharma (PPH) 61.91 -4.0% +4.3%
Basic Mat (IYM) 62.52 -8.1% +3.2%
Health Care (IYH) 61.98 -5.5% +2.7%
Utilities (XLU) 30.20 -5.3% +1.6%
Telecom (IYZ) 19.96 -7.4% +0.1%
Industrials (IYJ) 55.47 -7.1% -0.8%
Transportation (IYT) 78.72 -6.9% -1.1%
Media (PBS) 11.82 -9.0% -2.2%
Real Estate (IYR) 49.05 -8.5% -2.6%
Semis (PSI) 12.71 -6.0% -2.6%
Software (PSJ) 20.52 -8.8% -4.4%
Water (PHO) 15.37 -7.7% -4.5%
Defense (PPA) 16.06 -7.2% -6.5%
Insurance (PIC) 13.52 -7.6% -7.3%
Biotech (PBE) 17.43 -6.5% -8.0%
Construction (PKB) 10.25 -6.9% -8.1%
Financials (IYF) 44.98 -9.5% -14.3%
Nanotech (PXN) 6.94 -6.6% -23.2%
Alt. Energy (PBW) 6.47 -9.8% -31.0%

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