How an Ugly Stock Market Affects Investors

This is an ugly market. Investors will be forgiven for feeling worried, anxious, and confused about what to do. To use George Harrison's words, 

"Been beat up and battered 'round
Been sent up, and I've been shot down
You're the best thing that I've ever found
Handle me with care"

From the bottom in March, 2009 until a few weeks ago, the stock market was the best thing investors had ever found. Today we're in the 2nd correction of 2018, and it could get worse before it gets better.  

I'm not going to try to explain what's causing the latest downturn except to say that the cohort of investors who have been keeping this magnificent bull run going -the intrepid dip-buyers- have gone AWOL. Will they return in time to save the day? I'm not sure, but they have a long history of doing just that.

Investors have enjoyed 9 years of ultra-low interest rates and an abundance of liquidity, thanks to the Fed. It's almost as if the Fed has been injecting a high-powered drug directly into the veins of investors to keep them buying and prevent them from worrying about the downside. 

Maybe those days are coming to an end. It's too soon to know for sure, but Chairman Powell is determined to remove the needle and allow the market to go through withdrawals, no matter how severe. Trump is jawboning Powell, and it remains an open question whether Powell will fold or stand his ground. (A little Tom Petty thrown into the mix for good measure.)

As ugly as this selloff has been, we are still not officially in a correction yet. In the late afternoon of trading today we crossed below -10% with big volume. But during the last half-hour the market rallied just enough to keep us above that level. Why? I don't think it was the dip-buyers. I think it was just short covering by the hedge funds, who are desperate to have a winning year and protect their year-end bonuses.

In my experience, about half of retail investors just follow their gut when it comes to making decisions about what to do in ugly markets like this one. The vast majority consistently underperform the market because decision-making based on emotion is not a viable way to go, unless you happen to be a wizard. I've never met a wizard, but they might be out there.

The better way to go is to have a well-thought-out plan, including a Plan B for situations just like this. But even these investors are severely tested when they see the value of their savings drop day after day, week after week. Many will abandon their plan and join the emotional crowd.

But some will stick to their plan, and these are the folks who are most likely to come out on top.

The market has now blown through 4 support levels. The latest casualty was the 200 day moving average. The next one is the -10% mark, which we narrowly avoided today. And the next one after that is the previous low of 2,581 set back in February during the last correction.

Once we get to 5 support fails, things will likely turn even uglier. The only saving grace that I can see today is the fact that a recession is at least 6 months away. Without a recession, these market downturns usually run out of gas after they breach the -10% mark.

I hope this holds true this time.