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The Big Bungee Jump: Stocks Soar in Dizzy Trading

Pass the Dramamine. How gut-wrenching was Tuesday’s trading? At one point, the Dow swung 900 points in 20 minutes. After a day of extreme gyrations, the main indices closed in the green.

Stocks bounced up and down all day. It seemed as if investors had jumped off a cliff wearing a bungee cord.

Markets have witnessed dizzying declines in recent days. Tuesday’s gains followed an historic drop on Monday that saw the Dow plunge more than 1,100 points in one day. Investors are rattled by rising interest rates, stirring inflation and political risk.

Some analysts now say it’s an opportune time for bargain hunters. But the market is volatile. The bulls are skittish. Today’s rally brings to mind an old Wall Street expression: dead cat bounce.

A dead cat bounce is a temporary recovery in share prices after a massive fall. It’s caused by speculators buying to cover their positions. It’s followed by a continuation of the downtrend. The saying stems from the notion that even a dead cat will bounce, if it falls from a great height. A grisly image, but the point is well taken.

How can you tell when the market has stopped falling? You can’t.

Your best bet is to ride out the volatility. Stay cautious. Stick to your long-term strategy. Strong stocks invariably recover. But in the meantime, the market carnage could easily resume.

What goes up, goes down…

Since his election, President Trump has bragged about the bull market. Lately, he’s been quiet on the subject.

In a Politico podcast before the market plunge, former Treasury Secretary Larry Summers had this to say:

“It’s crazy for a president to wrap himself in the stock market. The market goes up and the market goes down, and if you take credit when the market goes up, I don’t see how you can avoid taking responsibility when the market goes down.”

Let’s be clear. At Investing Daily, we’re not partisans. We’re capitalists. The message here is, don’t get intoxicated by bull markets. Many investors seem surprised when they learn that stocks can go down as well as up.

Today, stocks went up again. After a wild ride. But the markets could be a presidential tweet away from plunging again.

Stocks have been on a bull run since 2009. The S&P 500 rose 19% in 2017. The rally was fueled by robust earnings. The GOP tax cut provides more impetus, but it’s a double-edged sword. The economy could overheat. The resulting deficit could roil financial markets.

Leading up to the meltdown, I’ve advised investors to reduce exposure to growth stocks and raise cash levels. If you had done so, you’d be in better shape right now than traders who were overexposed. It’s not too late to take defensive measures. Today the markets bounced. But it’s unclear how many lives this cat has left.

Tuesday Market Wrap

  • DJIA: +2.33% or +567.02 points to close at 24,912.77
  • S&P 500: +1.74% or +46.20 points to close at 2,695.14
  • Nasdaq: +2.13% or +148.36 points to close at 7,115.88

Tuesday’s Big Gainers

  • Micron Technology (NSDQ: MU) +11.37%

Chipmaker issues positive outlook.

  • Skyworks Solutions (NSDQ: SWKS) +10.44%

Chipmaker reports strong earnings.

  • Tapestry (NYSE: TPR) +9.36%

Coach parent beats on earnings.

Tuesday’s Big Decliners

  • NQ Mobile (NYSE: NQ) -43.62%

Undisclosed transfer of subsidiaries weighs on smart ride firm.

  • Clearwater Paper (NYSE: CLW) -22.62%

Paper firm’s earnings disappoint.

  • Colfax (NYSE: CFX) -8.96%

Industrial fluid maker sees earnings fall.

Letters to the Editor

“What’s your view of target date funds?” — Alexis C.

Asset-allocation mutual funds are increasingly popular. They’re known as “target date” funds. These funds provide investors with portfolio allocations based on their age, risk tolerance and investment objectives. But this “solution” is too standardized. It doesn’t address individual requirements.

About a half-trillion dollars are now invested in target date funds. Target date funds are simple to use. You pick the target date fund that will “mature” closest to your retirement date.

These funds are typically issued in five-year increments — 2020, 2025, 2030, etc. As the target date approaches, the fund’s allocation grows more conservative. The exposure to equities is diminished as the allocation to bonds and cash increases, reducing risk and volatility.

Target date funds seem to be the perfect solution to the challenge of asset allocations. But there are no panaceas.

One problem with target date funds is that their allocations are based on past returns. They don’t account for the current market environment. Many entail high expense burdens. The upshot: You shouldn’t put investments on automatic pilot.

Questions about mutual fund investing? Drop me a line: mailbag@investingdaily.com

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.

 

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