The Big Ouch
The big ouch is something that investors have grown all too accustomed to over the last three years. If you don’t know this phenomenon by name, you’re sure to know it by feeling. It’s that gut wrenching sensation you get when all the gains that you had in a particular stock, or a group of securities, evaporates almost instantaneously.
It’s that moment when you’re jaw drops and you wonder to yourself how you could have been so naïve as to think that you actually had any control over the price movement of your favorite small-cap stocks. When you realize that yes, you did do a good thing when you purchased shares and they almost immediately went up – but that you never sold.
That’s the big ouch. You may express it with more descriptive four letter words, but this is a family friendly newsletter.
Emotion is something independent investors have been grappling with for a long time. And we’ve felt it frequently since mid-2007. That’s when the volatility in the market really began.
***Take a look at the 3-year chart of the Russell 2000 below and you’ll see exactly what I mean. Last week’s drop, seen clearly on the right side of the chart, represents a big ouch – when emotional selling took control. Even if you take out the ‘electronic glitches’ that may have precipitated the drop, the selling pressure was still undeniable.
But even though you may have thought the market was saying sell everything at once, you probably didn’t. Being an independent investor means having a cool head, keeping things in perspective, and not just reacting to what happens on a daily basis.
I use one year, three year, and ten year charts to help me keep things in perspective. It’s helpful to remember where we’ve been when trying to forecast where we’ll go. We already looked at the three year, so I’ll put things in perspective over the shorter term.
***I’ve been saying since back in 2009 that I believed the Russell 2000 would hit 750 in 2010. And it’s come pretty close, reaching 745 on April 29. But after last week, the gains in 2010 were all but wiped out. The index plummeted back to 653, near the 640 range that now provides downside support. If the Russell breaks below this level, we’re more than likely to see 600, and possibly even lower to 600, or 580. It’s easy to see these support levels on the one year chart below.
***Even though last week’s action was painful however, I think it’s a little early to call for a prolonged plunge for stocks. I was speaking with Trademaster’s Jason Cimpl this morning and he agrees. He thinks that until the February lows are taken out (that’s the 580-600 range on the Russell 2000), the bullish trend needs to be respected.
But I do think that the period of buying exuberance is over, for now. Take a look at the ten year chart of the Russell below to put everything in perspective. I would content that the Russell 2000 has a high probability of trading between 650 and 750 for at least a few months. This range has provided resistance, and support, numerous times since late 2006.
The fact that we’ve recovered to these levels since the March lows signifies that the market believes the global economy should be able to function reasonably well for the foreseeable future. If it changes its mind – it’s ‘look out below’.
***On that note, the EU finally got its act together over the weekend to put together a bailout package for – well, the EU. The 16 countries in the EU had been slow to move on this, but I suspect last week’s market action gave them the push that was needed to wrap up a deal.
Of course, the U.S. Fed is also in on the action, so this isn’t entirely an EU solution. It’s no mystery to anyone that Europe has debt issues, and the fact that the U.S. is helping is of small consolation given our own issues with over-spending.
But for now, tragedy averted. And the markets are responding with a big push that makes a break off the February lows more unlikely.
***But investors have been reminded of the big ouch – so I don’t think that we are off to the races again. Expect volatility to stay around for a while, and expect other investors to take gains when they have them.
I’m a long-term investor, so I’m not going to suggest trying to time tops and bottoms. But I do like to keep things in perspective – and right now perspective is telling me that we are going to be trading sideways for at least a few more months. This can be a buying opportunity, but be sure to use limit orders, and average in to your positions.
I’d like to hear from you regarding the markets action over the last week, and the events surrounding the $1 trillion aid package for Europe. Drop me a message, my address is: editorial@smallcapinvestor.com
