Stocks Plunge – Ignore or React?
When the market plunges what is one to do?
After seeing consecutive days of positive movement, the markets headed downwards on speculation and bad news. Before we jump to any conclusions, should we ignore or react to the activity seen in today’s market?
Step back and analyze
At first glance, many would jump at the site of red and sell; however, what if that meant you losing more money than had you actually held your position?
For more specific examples, we will look at what happened today. Speculation was circulating that the government would bail out Fannie Mae (FNM) and Freddie Mac (FRE) and more bad news was looming over the financials. The weather at the tip of Florida doesn’t make matters any better.
To decide what we should really do, we need to reconsider what the market has done over the past couple of months with this same type of information. In this case, the market tends to oversell.
In other words, when the these specific companies have sparked some controversy the market as a whole has been ripped apart. Companies with solid numbers and workings are unnecessarily sold. By reacting too fast and selling these particular shares, you are potentially missing out on movements back in the positive. As many see the upward movement they decide to get back in, but by that time they are too late.
But how do you determine the oversold from the not?
When it comes to financials, unless you are in for the long haul, it is best to sell everything off. Many have gotten back into the messy sector and seen great results; however, with Fannie and Freddie coming back into the spotlight, most financials will continue their ride closer to $0.
The key is to look for solid stocks, with relatively no connections to the financials. As a quick example, we will use Nike (NKE). The stock headed downwards today, but, with solid global exposure and a great brand, it behaves just like a speed bump in the road.
Don’t shy from red
Just because the markets have been slaughtered on a particular day, that does not mean you need to empty all your positions. Sometimes it is even better to buy more shares than sell. Take a good look at your holdings and determine the good apples from the rotten.
Need help? Then let me determine if you should hold or sell (contact me or leave comment) or use the trend analysis tool and figure it out yourself.