The NASDAQ plummeted 1.4% yesterday, while declines in the S&P 500 and the Dow Jones Industrial Average amounted to 0.9% and 0.8%, respectively. The Small Cap Russell 2000 fell about 0.6%, while higher volumes ran across the board. Deep stock index declines, with high volume days, signify heavy institutional selling.
Despite the heavy selling, there was a silver lining in the clouds: The big banks all passed the Federal Reserve imposed “Stress Tests” and were given the green light to boost dividend payments and initiate multi-billion dollar stock buyback programs. The financial sector gained approximately 2% – 3%, amidst the bloodbath in technology and growth stocks.
So, is a summer sell-off underway?
Ever since 2009, the stock market underwent pullbacks about this time of the year. Let’s take a look at what happened with the NASDAQ during these years.
- Last year – There was an 8.2% draw-down, which bottomed out on June 27.
- 2015 – There were two flash crashes during August, in which the market declined 18%.
- 2014 – The market draw-down amounted to 3.6%, which bottomed out on Aug. 7.
- 2013 – A 6.7% pullback occurred, which bottomed out on June 24.
- 2012 – A 10.1% pullback transpired, which bottomed out on June 28.
- 2011 – The pullback was 19%, with a bottom on Aug. 9.
- 2010 – The pullback was 18.7%, with a bottom on July 1.
- 2009 – The pullback was 8.1%, with a bottom on July 8.
The median draw-down in past eight years was about 8% to 10%, averaging around 11.5%.
If recent history is any indication of the near future, chances are that we will see a near-term pullback in the coming days, or weeks, with a bottoming out sometime before summer’s end. Just keep in mind the rebounds that succeeded the past eight summer lows resulted with big bounce-backs in the region of 7% to 24%. The median bounce-back was roughly 13%.
So, what does this all mean? Take some profits now, build up your cash position, wait and observe the market closely. If the market sells off into bear territory, then reallocate your equity positions into bonds and precious metals. Heck, open up a Poloniex or Bittrex account and trade some cryptocurrency ICO’s (which is the equivalent to the cryptocurrency’s version of IPO’s). However, if there’s only a slight pullback, then have your cash ready for the subsequent rebound.
Also published on Medium.