Into Rough Seas

This post is 100% disposable. By the time you read it it may be completely irrelevant. But it’s information I want you to have right now.

Also, this is not a “the market is crashing” post.

Unless you spent the week binge watching all six seasons of Kate & Allie, you’re probably aware that we’ve had some violent days in the market.

As nerve-wracking as it’s been to watch triple-digit down days in the S&P-500, on a percentage basis, none of these moves has even cracked the Top 20 biggest declines.

I don’t tell you this to reassure you, I tell you this to warn you.

We haven’t seen a really bad day yet. But we still might.

The problem with violent moves is that they break things. Things like allocation models. Risk profiles. Margin requirements. And so on.

You need to look no further back than Monday to see how volatility “broke” the XIV ETN.

And when things break in the market, the mechanics take over, often forcing individuals, funds, or institutions to do something they don’t want to do – sell indiscriminately – which further exasperates already extreme moves.

I believe we are currently in a “market mechanics” type of environment.

Does this mean the market is due for a major crash?

Absolutely not. The market could as easily rally 5% from here as it could drop another 5%. I have no insights into what it will do, but I can tell you what I think it has the potential to do in the near-term.

It has the potential to make a move greater than you’ve ever seen before.

This type of move won’t respect your EPS estimates, valuation models, or even my beloved technical analysis  – and you don’t want to be caught on the wrong side of it.

So, what should you do?

Well, you don’t have to do anything. Sometimes watching from the sidelines is the best play.

But, if you have some dry powder, one thing you could do is get out your shopping list of stocks you’d like to own and put in some stupid bids way below the market.

What shouldn’t you do?

Don’t buy leveraged products.

Don’t go on margin.

Don’t buy at a price you’re not comfortable with.

Don’t buy a position you’re not comfortable holding for a while – and through more volatility.

And most important, don’t use up all your cash, in case you have to do the same thing again.

As I said, the purpose of this post is not to scare you, but to make you aware that (I believe) we are temporarily in the type of market that can do you real harm if you’re not careful.

The good news is that it will not last.

Someday – maybe not too far away – things will settle down and we’ll get back to a more “normal” market environment. And hopefully, when we do, you’ll have some spoils of war in your portfolio that will serve you well in the future.

But until that happens, be smart, be safe, and take care of yourself.

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