Well, the first day of trading for December turned out to be anything but boring. The morning’s explosive political news sent the SPX down 400 points, and for 30 minutes, the markets saw nothing but sell orders. Over at the NYSE, the ticker kept pounding at -1000 readings minute after minute as the support for the 30-stock index melted. Meanwhile, the Dow Industrials had its first weak session in a while, closing down about 45 points. In response, market volatility ticked up to 14%.
But as we have seen so often, dip buyers swooped in and the indices rallied back, closing only marginally lower. That scary drop felt all too familiar. Remember what happened after the Brexit vote? And on election night last year?
Those precipitous drops on heavy volume were soaked up by the dip buyers the next morning, and the markets were off to the races. New all-time highs were made after the Brexit drop and presidential election. Markets rose to new highs within weeks amid strong turnover, a classic sign of institutional buying.
We have long known that algorithmic programs react violently to news-driven headlines. There seems a coordinated effort in these cases: bids drop immediately, volatility products explode as demand for short term protection increases and demand for gold and bonds escalate.
Are these rational responses to the news? In the short run, maybe. But as we have seen in past instances, these “fixes” don’t last long.
How to approach market volatility
Many would instead say the best response is to buy the dip. That approach certainly paid off in 2016, and it may have paid off last week. We’ll have to see how it turns out!
For now, I would suggest keeping some powder dry (cash) on hand until the dust settles. Be patient, because there will always be a new opportunity to get on board in this stock picker’s market.
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