Maalox Market

MaaloxThank goodness February is over, I couldn’t have taken anymore (a little levity).

I will reference for the second time a comment I made a week or so ago about the psychological impact of another big move down being worse than the financial impact.

The market has been doing some strange things in terms of how fast it has gone down and at the same time how much it has gone down (22% YTD, that’s only 40 trading days). It is strange that the selling has not taken any sort of break and that it has now been a long time without some sort of feel good rally.

Regardless of whether you are a Roubinian or a Kudlowite the market action is odd. The biggest bears out there could have their thesis play out in a tape dotted here and there with sucker’s rallies but the action since about one week into the year has been unrelenting in its direction.

A huge portion of the writing I have done starting in 2004 has been about how to cope with markets like this when fear is at its peak (or close to it). The idea behind using a breach below the 200 DMA is a trigger point for defense is to avoid some of the emotion that bear markets eventually bring out. The idea behind talking about this bear, the next one and the one after is to drive home the point that bear markets are a normal part of the process.

Way back in 2004 I wrote about having a defensive strategy devised then when there was no emotion to cloud judgment. By preparing a strategy and by preparing mentally you have lessened the portfolio damage and the emotional angst.

A reader on Seeking Alpha noted that in his 30 years in the markets people always think the world is ending when the markets decline a lot. I can tell you first hand for most of that 30 years that the reader is correct. Eventually the majority gives into fear and do the wrong thing. The world is not ending. If you have a lot of cash built up your account will not go to zero, in fact odds are very few stocks will go to zero (has there even been 20 out of however many thousands of stocks traded?) and no ETFs will go to zero.

I may turn out to be wrong about the S&P 500 dropping to the 600 level or lower (I don’t think it will) but if that does happen, the psychological damage will be worse than the financial damage.

About Roger Nusbaum 169 Articles

Roger Nusbaum is an Arizona-based financial advisor who builds and manages client portfolios using a mix of individual stocks and ETFs. Roger writes a popular blog, which focuses on risk management, foreign stocks, exchange traded funds, options etc.

Roger has been recognized by many in the investment management industry for his expertise in portfolio management. Roger has been regularly interviewed by the financial press, trade journals, and television news shows. He has also had numerous technical articles published and has been quoted in a number of professional trade journals, newspapers, and consumer finance magazines. He appears frequently on CNBC Asia as a market commentator.

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