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Ah, the classic "Whac-A-Mole" game.
We can all undoubtedly recall a time when we went to the arcade and played it. And it serves as the perfect analogy for the current market.
Recently, every time we felt like it might be safe to stick our heads up and look around – WHAM! – down came the hammer, and the selling began again.
It has been a while since we have seen this type of selling persistence, and some folks I talked with during the past week were getting a bit edgy about owning or buying stocks.
"Straight up" has been the path for the better part of the decade and "buy the dip" has been an infallible trading strategy. So, naturally, the latest turn of events has left a mark on some people.
If you bought big on the first dip back in September, you have been hammered a couple of times now as prices just continued to fall. Every rally attempt was met with still more selling, and it stings a bit.
I'm sure a lot of people experienced a first in their lifetime, even in the past month, as those who were long with leverage received their very first margin call.
But if you're one of those people, let me explain why you should actually celebrate these recent lows…
The S&P Is Down 10% – Hold the Bubbly Until It Goes Lower
I have a friend who used to trade on the Chicago Board Options Exchange, and I once asked him how he fared the day of the crash in 1987. He had always had something of a bearish bent, and he had proceeded to play the day massively short on stocks.
He made millions of dollars that day, and he told me the hardest part of the day was not breaking into cheers until he had left the building and the sad faces of destroyed traders behind him.
As prices continue to fall, I start to feel a little like that. It's not yet a full-throated cheer, as the S&P 500 is only down a little over 10% and the Nasdaq is not yet down 15% from the all-time highs.
Much as children look to Christmas with growing anticipation, I look forward to continued selling. I am gleefully aware that we are below the 200-day moving average and that trailing 12-month returns are almost below the risk-free rate of return.
When that happens, a lot of momentum and hedging models should trigger more selling, and my lists of candidates to buy will swell with opportunity.
It might not happen, and we could see a rally that causes me to put the champagne back in the wine fridge and the Pappy Van Winkle back on the top shelf. But if prices continue to fall, I am going to be very happy about it.
I own some stocks right now, and their value will go down. That may sting a bit, but if you have been paying attention, you know that I have been cautious for some time now and have accumulated a nice stack of cash.
About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of "Max Wealth" and Heatseekers.