Don’t Puke Up Your Portfolio

The best time to buy stocks is when the thought of doing so makes you want to throw up.

We all know this is true. Buy stocks when everyone else is selling. Buy when there’s blood in the street. Buy low, so that later on you can sell high.

If we can step back from the action and approach the stock market without any emotional baggage, we know it makes sense to buy stocks when they go on sale.

But, when we’re stuck in the middle of the action, surrounded by everyone else who is selling, our emotions get the better of us, and we puke up our portfolio.

Lots of folks reached the hurling point on Monday. The S&P 500 traded down to 5564. It has lost more than 550 points in just the past two weeks – giving up all of the gains since the Presidential election.

Most folks couldn’t sell their stocks fast enough. That’s how desperate they were to stop the pain.

That will likely prove to be a mistake.

You see, just as buying stocks into overbought conditions is often a wrong move, so too is selling stocks into oversold conditions.

The time to sell stocks was in mid-January when the S&P 500 first closed above 6100. Technical conditions were overbought.

The S&P 500 was trading more than 100 points above its 9-day exponential moving average (EMA) – indicating an extended condition. And, we warned the risk to buying stocks was greater than the potential reward.

That wasn’t “bearish” commentary. It was merely a suggestion that the stock market would likely give folks a better opportunity to buy, and there was little to gain by chasing stocks higher into overbought conditions.

Now we have the opposite situation.

The stock market has been falling hard for two straight weeks. Technical conditions are oversold. On Monday, the S&P 500 traded as much as 195 points below its 9-day EMA – indicating an extended condition to the downside.

In fact, conditions are now so oversold that the potential reward of an oversold bounce is greater than the risk of a continued decline.

This isn’t bullish commentary. It’s merely a suggestion that if you were looking to buy stocks when the S&P 500 was above 6100 last month, then now is a much better time to do so. If you’re looking to sell stocks, then you’ll likely have a better opportunity to do so a couple weeks from now.

And, if any of this advice makes you queasy, then it’s probably advice that’s worth following.

Best regards and good trading,

Jeff Clark
Editor, Market Minute