Don the Crash Helmets! It’s Bloody and Ugly Out There!!

By now, everyone knows that the Dow Jones Industrials fell by 1000 points last week, including a 531 point down day to close the week. More selling lies ahead in the short-term. It’s getting ugly. There’s blood in the streets. Sell what you can not what you want. Margin calls are coming. Maximum pain thresholds are being hit for the individual investor. Panic is here!

Before I opine on what it means, let’s put it all in perspective. 531 points is a 3% decline and 1000 points is just under 6%. Since the Dow peaked on May 19, the popular index has corrected 10% so far. In a worst case scenario, it could grow to 15-20% if China unravels beginning Sunday night.

For several months I have written many times about my concerns with the market. The most timely blog post was right at the most recent top on July 20.

Trouble Brewing Beneath the Surface

There were plenty of opportunities to take action, hedge, play some defense, sell, just do something proactive! I am sure that the vast majority of investors did absolutely nothing. In our portfolios, I am happy to report that we definitely took action several times by selling to raise cash as well as buying bonds which typically act as a flight to quality or “safe haven”.

I am not arrogant enough or naive enough to believe that during a full-fledged stock market correction that we won’t lose some money, but I am definitely pleased with our high levels of cash. This is a market time that separates the wheat from the chaff. The “pretenders” in the business get exposed. Investors don’t plan to fail. They fail to plan.

I often speak about the investing risk/reward ratio, referencing 18,500 on the upside and 16,900 on the downside. That negative skew caused us to take various defensive measures in many of our 12 strategies over the past few months. With the Dow finally closing below 17,000 with more downside to follow, the risk/reward is in the process of swinging firmly back to the positive side. It’s time to build a shopping list and prepare to deploy some of the beautiful cash that has built up.

Before I dive into the details of the stock market, I am going to start with my conclusion. While the evidence is certainly not as strong as it was a few months ago, I do not believe that the 6+ year bull market has ended; read, all-time highs lay ahead. The weakness looks like the first full-fledged correction since October 2011. The behavior we are currently seeing looks similar to what we actually saw in 2011, as you can see from the two charts below.

dia16 dia11

As I write this over the weekend and have not seen any stimulative action yet around the world, the preponderance of the evidence suggests that stocks are about to the enter the bottoming process, as soon as this week. While that doesn’t mean an immediate return to Dow 18,300, it does suggest that the repair process starts sooner than later, although high volatility won’t end soon.

From time to time as my great friend and colleague, Sam Jones, likes to say; Calling All Cars. It’s time add cash to your accounts. Blood is in the streets. Panic is setting in. It’s time to take on a little more risk or open a new strategy that’s more aggressive. That will likely be my theme for the next few weeks. On a personal level, I will be making my entire 2015 retirement plan contribution over the next few weeks so you truly know I how view the current situation.

If you have any questions about the market’s correction or your portfolio, please don’t hesitate to contact me directly by replying to this email or calling the office.

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Paul Schatz, President, Heritage Capital
Paul Schatz, President, Heritage Capital
If you have at least $250,000 of investable assets and would like to schedule a complimentary meeting, call, or video conference with me, please click on my calendar here email me at Paul@investfortomorrow.com or call the office directly at 203.389.3553.

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