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Before leaving on vacation, I told you that I would be in touch if there were any market changes requiring your immediate attention.
Monday's hair-raising 760-point Dow drop certainly qualifies.
So let's quickly get into why this is happening…
First, headlines have nothing to do with the decline. Rather, they're an attribution – meaning the media loves a good story. So, logically, they'll come up with one like they did yesterday, when the Treasury Department designated China a currency manipulator.
Second, passive investments now account for 60% to 65% of all equity assets, which means that the major averages are a) increasingly sensitive to headlines and b) going to experience more frequent, sharp, and violent price swings. Another 20% of the markets are controlled by trend-following models. All told, that's roughly 80% of the market operating without human control.
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Third, public markets are shrinking. The number of public companies fell by half from 7,300 to 3,600 from 1996 to 2016, according to Credit Suisse. In 1996, nearly 700 filed to go public, but by 2017, there were barely 100, according to the CFA Institute and CNBC. So there's a constantly increasing amount of money chasing fewer and fewer quality stocks, which is why quality matters (a point I frequently make).
Fourth, the world's best investors buy nearly the same stocks. Conventional wisdom says you want to buy the stuff nobody's heard of and that does have a role in your portfolio – but the reality is that the best profits go to those who buy the most favored stocks. Believe it or not, this is a much more useful metric than valuation at the moment, with funds holding "top 10s" beating the markets 63% of the time, according to billionaire investor Ray Dalio and Institutional Investor.
And fifth, computerization now accounts for 60% of total stock market volume on "normal" days – if there is such a thing anymore – and can account for upwards of 90% when the you-know-what hits the fan. So big blocks trade quickly and more violently than humans can keep up, which moves prices very quickly.
Here's What to Do About It
Believe it or not, all is NOT lost.
In fact, the things I've just highlighted can be a tremendous advantage for individual investors seeking an edge. That's because the big boys have to move their money, whereas individual investors can be very selective about what, where, and how they buy.
Simply put, you want to do what's good for you no matter what the markets are doing.
Right now, that means paying careful attention to the trailing stops we talk about every week as part of nearly every alert. It means taking profits when you have them. And most importantly, it means buying into the world's best companies as long as the business case for buying 'em remains intact.
Think about yesterday's trading this way…
You're not losing an opportunity when there's a big drop; you're simply gaining a chance to buy something really good for a lot less money.
Big tech, for example, is already recovering in early pre-market trading as I write. Shares of Amazon.com Inc. (NASDAQ: AMZN), Microsoft Corp. (NASDAQ: MSFT), and Alphabet Inc. (NASDAQ: GOOG) are all up nearly 1% while Apple Inc. (NASDAQ: AAPL) has already risen more than 1% in early going.
There will always be time to buy… It just may not be today, and it may not be at the opening bell.
As always, I will be with you every step of the way.
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About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.