Keep Losses In Perspective
During last month's six-day stock slide, doomsayers showed up in force.
We can't blame them, because from a short-term perspective, the market's move was truly historical in scope:
• The S&P 500 Index fell 11.2% over six days, which has happened just 11 other times in the last 20 years, or about 0.2% of the six-day periods.
• We saw four consecutive daily declines of at least 1.3% on Aug. 20, 21, 24, and 25. Such a four-day streak has only happened two other times since 1995, most recently in 2008.
• The index's stock-market value declined by more than $2 trillion in five days, an all-time record.
The recent sell-off turned the Dow Theory bearish, and we cannot ignore declines of such violence. However, in the two days after the six-day rout, the S&P 500 reclaimed more than half of its lost ground. Declines of 5.5% have occurred in 3.2% of all eight-day periods in the last 20 years — not common, but far from historic.
These numbers set up two points.
1) The Dow Theory is designed for accuracy, not precision. The bear-market signal was unambiguous but tells us nothing about the breadth and depth of that bear market.
2) You shouldn't let short-term market swings drive your decision-making. Pay attention to key points, but try not to let your emotions ebb and flow with the Dow.
The Forecasts is here to help you navigate these rough waters. For our latest take on the market, visit the Subscriber Area at www.DowTheory.com/Go/Sub to see our daily online features, including the most recent hotline.