Hope springs eternal as stocks came roaring back from steep mid-day losses yesterday. Is the worst behind us? Maybe, but I doubt it. Picking exact lows and peaks is a sucker's game. Your job is to manage your emotions and look for opportunities. Here are three things you need to know and a strategy to handle the pain:
1. The selling will probably get worse. So far the fact that the tech and social media stocks have been pole-axed without taking the broader market with them is impressive, but it probably won't last. Selloffs don't end until the idea of a "rotation" is replaced with panic. We aren't there yet. Running away from a tech selloff by getting long shares of a bank stock is like running away from an oncoming train. The S&P500 is every bit as at risk as the Nasdaq, like it or not.
2. For the S&P 500 (^GSPC), Purple Crayon Support doesn't come in until about 1,740. That's about 3.6% lower and where we bottomed in February.
3. The Nasdaq (^IXIC) is all-kinds of broken. Resistance is now 4,000 and there's some support about 10% below here at about 3,600, which is where we were last summer.
Here's how to cope: If you can't sleep at night you need to use stop limits. That will take the emotion out of the process and keep you from being the guy who panics at the bottom. If you have cash, now's the time to start looking for opportunities. Pick some of your favorite stocks, enter a limit price, and then wait. Don't give in to your urge to day trade this thing.
Above all remember this: Unless you're on margin or in danger of letting your winners go negative, you don't have to do anything. Stick to your long-term plan. Don't kid yourself about the emotion of losing money but don't do anything crazy to try to ease the pain. Selloffs stink but this isn't the end of the world.
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