U.S. Markets closed

Rules for a Market Sell-Off: Don’t Panic!


The markets have been and are selling off hard. But you already know that. If you want a rundown of what caused this carnage, you can click back to our prior videos and columns. This piece is here to tell you what's happening now and help you deal with it.

Let's break down the internals, then handle the bigger picture. To that end, Matt Nesto ran some numbers:

* The VIX (^VIX) has climbed 30% over the past month. That sounds impressive but it only brings the index to somewhere in the low 20s. This is nothing compared to the 50 and beyond that accompanied the stock routs from the Internet bubble or financial crisis. Options traders were betting on this outcome in size, per Jon Najarian's conversation with me last week. (I spoke earlier with Jon. He says, in short, that the traders making the bet on a spike in vol got aggressive with it this morning and are taking off the trade now. Which is grossly simplified already but, to make it even more so, the options guys in the pit aren't betting on even more market panic setting in... at least for the moment.)

* The Automakers, Banks & Diversified Financials are getting kicked in the face with a steel-toed boot. On average the groups are down 25% from recent highs and about 15% in the last month, most of it coming in the past 8 days.

* Money is coming into Transports and Software, at least relative to the above sectors. Nesto notes the transports work well in a weak crude oil environment. Will they hold up to what seems to be a market bet on a crushing economic slowdown? Hey, I said they were relatively strong, not ripping higher.

* The market drop is creating seemingly attractive yields, especially compared to the 10-year Treasuries' 2.5%. As I write, AT&T (T) is yielding 5.9%, Intel (INTC) 4% and Pfizer (PFE) gets you 4.2%. It's not my bag, but if you're one of those dividend fans, these things are probably tempting. Again, they aren't so much something I'd do with my money, but your style may vary.

Which brings us to my style in general. I'm not talking about my rambling inability to stop speaking in metaphors, nor my  shaved head. I'm talking what to do in a sell-off. This isn't my first rodeo, folks. I lived through the Internet, LTCM and housing bubbles, and I'm still standing. I learned most of the below the hard way, and I'm giving this advice to you for free:

* Don't panic. I know I say this a lot. And I know "Don't Panic" is a cliche'. Stop whining about my redundancy and listen to me. If you can't sleep, if you can't settle down, if you're desperate to chase metals higher and puke stocks lower, you should go take a walk or pick up your kid from camp. Panicky markets make for good theater; sitting down to watch is a perfectly viable strategy today.

* Don't brag. I know a lot of you guys are long metals and short stocks. Congrats. Just keep in mind that people are getting hurt with both the sell-off and the economic meltdown causing it. Real people. Mr. Market will drag you behind his dog if you don't shut your mouth and count your blessings. I'm not kidding.

* Don't use today to develop a new investment philosophy. Today isn't the day to decide you're a day trader.

* Don't chase stocks higher or lower. If you're short, stock sell-offs like this are exactly what you were betting on happening. The market is down 8 straight days and counting. The S&P500 is fighting hard to at least bounce off 1,250. Shorting isn't the play here. If you can't sleep, trim your book until you can. If you buy dips, here's your dip. Other than that, less is better today for anyone who doesn't day trade as an occupation.

* Don't react. Anticipate.

* It's all about the close. The S&P doesn't break 1,250 support unless or until it closes below 1,240. It's at 1,244 now. Don't assume a breakdown.

Those are your rules for sell-offs. Your style may vary, but  I paid top dollar learning these things. Watch the video and take the time to comment below; especially if doing so keeps you from doing something rash with your portfolio. You can also drop a line at Breakoutcrew@yahoo.com.