A Special Note on Today’s Selloff

Keith Fitz-Gerald Oct 10, 2018
1 

Good afternoon!

I was just about to “go to press” with Total Wealth today, when the selling suddenly accelerated. At this point, the Dow is off 550 points and the fear is palpable.

So, let’s switch gears and focus immediately on what’s happening.

First, the biggie… will the selling continue?

Yes. Institutional traders came into today very heavily leveraged, which means that they’re going to unload everything but the kitchen sink as a precaution against margin calls that could easily wipe them out.

How deep will it get?

Unknown. That’s a function of how fast the big traders can unload and how much debt the big traders carry.

You’ve heard me say for a few weeks now that a good old-fashioned pipe cleaning is overdue, and that’s what we’re getting. But it’s ultimately a good thing.

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My guess, based on what I’m seeing and hearing from other traders around the world right now, is about 5% to 10%, which would be in line with current support levels. I’ll re-evaluate if it deepens beyond that.

What am I watching to help me make that decision?

I’m particularly focused on a technical indicator called the known as the VWAP (pronounced vee-whap). VWAP stands for “volume weighted average price” and it’s tied to trading volume within specific time frames.

What makes the VWAP so important at the moment is that it is tied very closely to the institutional trading community which is driving the selloff, especially traders acting on behalf of the world’s biggest pension funds, hedge funds, and prop shops.

The VWAP gets out of line when orders are so big that the market’s normal pricing is hijacked, and returns to normal when the order flow dies down… along with the panic that’s created it in the first place.

The VWAP is still accelerating which tells me the selling could intensify before it gets better.

Should I sell everything and run for the hills?

Not if you don’t have to. Obviously, I cannot advise you personally because I don’t know your personal investment objectives or your risk tolerances. Make a quick call to your personal financial advisor if needed.

History shows very clearly that the markets ebb and flow, which is exactly what’s happening today. Moreover, it also shows very clearly that you want to remain on the offensive as long as the underlying case for owning the stocks you do remains intact.

In our case, that’s why we focus almost exclusively on the Unstoppable Trends and the “must-have” companies we talk about all the time. Not only do those have trillions of dollars backing them, but they’re the single best and most profitable way to tap into raw, unadulterated growth.

What should I be doing now?

Three things:

First, you should be selling the moment you hit a profit target or trailing stop. Don’t look back and don’t question what you are doing. We use those things for a reason – as an additional precaution against days just like today.

Second, you should be making a list of companies you want to buy as they’re put “on sale” – meaning at far lower prices than the markets, apparently, are going to make possible. Think Apple Inc. (NasdaqGS:AAPL) at a 20% discount, Amazon.com Inc. (NasdaqGS:AMZN) at the same, Alphabet Inc. (NasdaqGS:GOOGL)… you get the idea. The big defense contractors are also a good play here, as are companies like American Water Works Company Inc. (NYSE:AWK) where you’ve got dividends and growth.

Don’t worry about trying to catch the exact bottom. Close enough is plenty profitable, pun intended.

And, third, you want to take a proverbial “chill pill.” The markets are littered with the bones of investors who tried to second-guess conditions like the present, only to find out that the longer-term fundamentals we prioritize are far more valuable.

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It is quite literally more expensive to miss opportunity than it is to try to avoid the periodic speedbump.

Is there anything I can buy right now to defend my portfolio?

Volatility has jacked the prices of most put options, so at this point, you’re pretty much left with inverse funds like the ProShares Short S&P 500 (NYSEArca:SH) or the Rydex Inverse S&P 500 strategy Inv (Nasdaq:RYURX). I recommended both of those a few weeks back, so hopefully you’re on board.

Studies show that 1% to 3% exposure to those types of investments can provide the stabilizing influence needed to take the sting out of all the red you’re seeing blitz across the internet.

Why are tech stocks getting hit so hard?

Understand there’s nothing wrong with any ’em.

The big institutions that are doing all the selling simply happen to own gobs of shares, which mean that those are the first things to get unloaded if there’s a margin call or a correction. They’re also the most liquid.

That’s important because most of the selling is being driven by highly computerized programs that

have nothing to do with the underlying business case for owning those stocks whatsoever. So, liquidity is critical.

In closing, the key to surviving this pullback (and any other for that matter) is to use it as a position of strength.

Most investors, of course, will never make the jump. They will panic and many will make terribly poor, knee-jerk decisions that wipe out years of big gains in an instant.

I am determined NOT to let you make that mistake.

Hang in there and take a deep breath.

Go for a walk or, like I did this morning, a motorcycle ride to clear your head. Take the dog out, hug your spouse or your partner. Think about something else for a bit!

I will be with you every step of the way.

Best regards for great investing,


Keith

One Response to A Special Note on Today’s Selloff

  1. Jorge says:

    Thanks, Keith. I was very surprised that my portfolio actually went up yesterday. My short hedges came in handy!

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