SPX was down more than 5% in a month 63 times since January 1950. In 33 out of 63 cases, the following month was negative for the index. On the graph above you may see the distribution of 5% down months. December had only one occasion where SPX was down more than 5%.
After a sharp decline, some stocks can have short-term bounces or rallies; however, in my experience few stocks bottom out when you expect them to do so. And, even if they do bottom, often they simply move sideways for an extended period, wasting valuable time. There are periods in the market when the reward to aggravation ratio is just not worth your valuable time and capital.
If you’re looking to find the next big market winners—the market leaders—then you want to keep your eyes peeled for the stocks that hold up the best (not the worst) during a market decline, and then buy them as they emerge from the market’s wreckage and move into new high ground. This will occur AFTER the stock’s price undergoes a consolidation period of several weeks or more.
75% of the price movement in most stocks takes place in 20% of the time. The rest is nothing but noise within a range. Relevant information that causes repricing doesn’t change quickly and frequently. This is why trends exist. Higher prices often attract more buyers and lower prices attract more sellers until the rules of the game change. Focus on the main drivers and forget the rest.
Not all great investing/trading ideas are profitable. Ideas that spread are. If no one else sees what you see and acts, you can’t make money. Hoping that eventually the rest of the market will understand and embrace your thesis is a loser’s strategy or a privilege for someone with very deep pockets. Markets often know more than you as they constantly try to discount all the available public and private information. You might be convinced that your analysis is right and the market is wrong, but it could remain wrong longer than you could remain solvent. The question again is do you have deep enough pockets to ride the storm out and aren’t there more plausible alternatives for your capital at the time. Smart people like to scale in and out of positions, knowing that no one can consistently pick tops and bottoms.
Take for example Jim Rogers. He is a typical contrarian investor, who likes to buy low and sell high. But he is not buying anything that is low priced and neglected. He buys cheap things only when he sees a fundamental change on the horizon – a catalyst that will help other market participants to re-evaluate their thesis and act on their new observations.