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Did you come through this week's market volatility with flying colors?
I sure hope so.
We've talked about how you handle big down days many times and, today, that's what we're going to talk about again.
This is important stuff because what you do when the markets get a bad case of the jitters can significantly boost your profits.
To be fair, I get that a downdraft is scary.
You're not alone if you feel that way - in fact, I feel the same angst you do.
There's always a fear that there's something worse ahead... another shoe to drop... a shark lurking unseen beneath you in the financial ocean.
That's rarely the case.
More often than not, any downdraft is short-lived for two reasons:
- It's related to a short-term change in market conditions; and,
- Today's trading computers rapidly adjust.
That means capital will come rushing back in when things calm down, as long as there aren't any systemic risks.
I get asked frequently how you can know the difference between short-term market risks and longer-term systemic risks. That's a great question with a simple answer that can make or break your profits.
Short-term risks are typically situational. They are typically driven by data points like a change in interest rates, rumors, or even somebody with "fat fingers" - a trading expression meaning they've entered a large order by mistake that gets executed before it can be corrected or removed.
The litmus test is simple.
If whatever's happened does not disturb the long-term business case for the stocks you own and the recommendations we follow, then it's a short-term disturbance and a great buying opportunity.
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Long-term risks are systemic, meaning they're system-wide and impact everything. Examples include the complete breakdown of derivatives trading that led to the global financial crisis in 2008. War, a bioweapon, or plague would do it, too.
In this case - meaning early last week - traders and the computers that support them with hundreds of billions on the line had to adjust to a change in longer-term interest rates. That means huge buy and sell programs came online automatically to rebalance in accordance with the risk-reward programs that drive them.
The sell-off was exacerbated by Amazon.com Inc.'s (Nasdaq: AMZN) joint healthcare announcement with Berkshire Hathaway Inc. (NYSE: BRK.B) and JPMorgan, Chase & Co. (NYSE: JPM) because that, in turn, caused still more rebalancing. Companies like Cigna Corp. (NYSE: CI), CVS Health Corp. (NYSE: CVS), and UnitedHealth Group Inc. (NYSE: UNH) are all broadly held - which means billions of dollars came into play when they came under extreme pressure almost instantly.
Three Ways to Position Yourself for Profits Immediately
The best way to prepare for a pullback is to do so when the markets are in "rally mode" - meaning headed sharply higher. That's when you're going to want to take action.
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.
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