U.S. equities markets suffered their worst performance of the year this past week, with the Dow Jones Industrial Average falling 3.52 percent, the S&P 500 dropping 4.30 percent and the NASDAQ Composite off an incredible 5.28 percent. The Dow has been down 12 out of the past 13 trading sessions; something that has not happened since 1974.
Where do we go from here?
Many pundits claim that stocks are oversold and therefore are due for a bounce. Although we may see stocks attempt a rally this week, I do not see stocks returning to rally mode anytime soon. Both technical and fundamental factors are clearly negative, and the combination of these will very likely be too much for the bulls to overcome.
This doesn’t mean they won’t try! Markets rarely go straight up or straight down. We have already had a few bounces during this latest correction, which now amounts to about 9 percent on the S&P 500 from the recent high of 1,422. I see some minimal support around the 1,275 level and then at 1,250. The 1,200 level on the S&P 500 offers more substantial support for this index, with 1,100 serving as what I see as the worst-case scenario, which is where the October 2011 low was set before stocks mounted a 30 percent-plus rally.
The Facebook IPO, which priced Thursday at $38 per share and began trading Friday, should have sparked a rally if we were going to get a short-term bounce for stocks. Although the stock opened higher, it quickly faded, ending the session only a few pennies above the offering price. I wrote on my blog prior to the opening of trading for the stocks that I would avoid this deal. Those selling shares and the underwriters got greedy, increasing the size of the deal and the price range, and turned what would have been a very hot and successful IPO into an utter failure. I will be shocked if Facebook does not break below the $38 offer price this week.
The failure of the Facebook IPO was not only bad for Facebook, but it crushed the other social media and related stocks. Shares of Zynga, the leading social gaming company (which gets much of its revenue from Facebook), fell about 20 percent at one point, and were halted twice. Zynga closed down 13 percent at $7.16. Other social media stocks, including LinkedIn, Groupon, Pandora Media and Yelp, fell more than 5 percent on Friday, with Yelp losing 12 percent.
More important, any other social-media companies that want to sell stock in the public markets in the future will have a much tougher time attracting investors. If (when) Facebook wants to come back to the market and sell more shares, it may get a frosty reception, as well.
As I have written, I have been accumulating and holding large cash balances since the S&P 500 traded above 1,400, looking for this correction. I will become increasingly aggressive about reinvesting this cash for my clients as stocks continue to correct, using the support levels outlined above as target points.
Our current market activity and economic situation provide strong motivation for investors to have a well-conceived investment strategy in place. At times like these, with high volatility during a correct phase, the need for a true, long-term investment strategy is acute. These are the times when investors make serious mistakes, especially those who do not have a strategy in place. Investors who prefer to make their own decisions without the help of a qualified expert, or those working with “advisers” who fail to develop an appropriate and effective investment strategy for their clients, can erase years of hard work and sacrifice.
Any investor who does not have a well-defined, specific, written investment strategy in place today should be actively working to put one into action right now. In my experience. there are usually only one or two significant opportunities each year in the stock market to make meaningful changes to portfolios to drive above-market performance, or, much more important, to avoid significant losses (as is the case today).
The investment industry has brainwashed investors into believing that raising cash when markets are expensive and holding cash during corrections is somehow a terrible idea. The idea behind this is that it is impossible to “time” the market. My counter to this notion is that time has nothing to do with it. I raise cash when I believe valuations are unattractive and I buy when I think they are attractive again. The amount of time it takes for these changes in valuation to occur are meaningless to me.
Besides, these same supposed investment experts that frown on raising cash use asset allocation programs. Asset allocation is just another form of market timing, if we use their definition! When they rebalance, all they are doing is taking money away from asset classes that they believe are expensive and reallocation that money to those asset classes that they feel are inexpensive. If raising cash when stocks are expensive is market timing, then so is asset allocation!
Regardless of your particular investment style, philosophy or objectives, every investor needs an investment strategy. The trick is to combine your style, philosophy or objectives with the current and expected future market and economic conditions, and your time-horizon and risk tolerance, to formulate an appropriate strategy for you specifically. Again, if you don’t have a strategy in place; get one. If your adviser hasn’t provided you with one, get a new adviser!