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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.
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About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean, and he's also the founding editor of Straight Line Profits, a service devoted to revealing the "dark side" of Wall Street... In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.