Yesterday morning, on the 30th anniversary of the biggest one-day decline in the history of the U.S. stock market, the S&P 500 was set to wipe out all of the gains of the past two weeks.

The index lost 12 points in the early moments of trading.

It was a bloodbath. Nervous traders saw red on their quote screens instead of the festive green they’ve grown so used to seeing.

“I thought something was wrong with the internet,” one trader was overheard saying, “There were minus signs instead of plus signs. It frightened me.”

Financial television talking heads were prepared to go into panic mode. “This could be it,” one reporter announced, “This could be the start of a selloff. It is, after all, the anniversary of the crash.”

If the morning decline had held through the end of the day, the S&P would have closed 0.4% below its all-time high. We haven’t seen that sort of a decline all month. We don’t know how the investing public would have responded to a loss like that. We can only guess that it wouldn’t have been pretty.

Fortunately, we don’t have to make that guess.

Stocks bounced back by the end of the day. Red quote screens turned green. Plus signs appeared where minus signs had been. And the S&P 500 rallied just enough to notch another new all-time high.

Whew.

Of course, we don’t know for sure what stopped the early-morning slaughter of stock prices and ignited the afternoon bounce. Maybe it was the superhero technical analysts who reported the S&P 500 was finding support at its 9-day EMA. Maybe the head of the Trilateral Commission fired off an angry email to his minions, telling them it was too soon to set off a stock market panic. Maybe it was divine intervention reminding investment bankers that performing “God’s work” usually involves raising stock prices.

All we know for sure is that the stock market was on the verge of a massive 0.4% decline. And somehow, some way, we dodged that bullet.

Of course… I’m being sarcastic today.

It was curious, though, to see how concerned so many people were when the market opened lower yesterday. Financial reporters and market commentators appeared genuinely concerned that we could have a repeat of the ordeal that happened 30 years ago. I received several emails from trader friends asking me if I thought things were going to get much worse.

If folks are getting this worked up over a 0.4% decline in the stock market, just how frightful will they be when the market has a 1% drop, or a 3% drop, or (gulp) something larger?

On Monday, I noted that the Bollinger Bands on the Volatility Index were pinching together. This is a condition that often results in a quick spike higher in volatility. And those spikes are usually the result of a decline in the stock market.

We’ve avoided that decline so far this week. But I’m thinking yesterday’s action may have been just a warning shot.

This is probably a good time to be extra careful about putting new money to work in the market. I suspect we’ll get a better chance to do so in the days and weeks ahead.

Best regards and good trading,

Jeff Clark

P.S. How have you traded selloffs like these in the past? Were you around for the carnage from 30 years ago?

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Reader Mailbag

Thanks for the tip on HOG. I got in at $1.16 early on 10/17 and sold on 10/18 at $1.80. I missed selling at $2.05 on 10/17 because I was out surfing, and by early 10/17 it was around 1.55, so I figured I set a limit sell to close at $1.80 because I wasn't sure it would get back to $2.05, and sold at $1.80. It was my first trade since signing up with you last week. Looking forward to more.

–  Alan B.

Internet finally cooperated and took advantage of being patient and watched the indicators and was able to sell HOG at $2.00…good trade.

The internet here in Iraq has been pretty unstable, I was barely able to get in the ABT trade… but I'm in… Let’s hope it stays fixed…

–  Karl H.