Monday, July 19, 2021

It Was Bound to Happen, Though Nothing Has Changed

Note: In the last 30 minutes of trading, the DJIA recovered somewhat, to close at 33,962, or 716 points down. 

A sort of panic has set in. As I write this (about 2:20 PM CDT), the DJIA has plunged 900 points. 

But that's not even 3 percent. So it's not as extreme as it sounds.

In my opinion, markets had gotten ahead of themselves. Prices were too high. But economic indicators have continued showing signs of growth. The Shiller PE ratio is at 37; not an all-time high, but still very high. 

While inflation is a concern, investors had that albatross for several months. 

Investor (retail) sentiment was at an all-time high. According to some theories, when retail investors get this giddy, it's a sign the market may reverse direction. (In fact, most retail investors are still buying at market highs, and selling at market lows, according to most studies).

The energy markets have been beaten down in the last few days. Oil (WTI) futures are down about $10 a barrel in the last five days. Over the weekend, OPEC announced production increases for next year. This added the fall in prices today, another $4 per barrel. Overall, the sector is down some 17% since its peak in mid-June.

Some in the media pinned the decline on Covid fears. Some in the media always try to find a reason, but the truth is simply there is more selling than buying.

But the overall market is only down about 3% from it's all-time highs last week. Some market "experts" are calling for a 10 to 20 percent correction, and while that may be true, it may also not be true. This is the second time that the market has dipped since April. I think it's part of the natural process. 

The chart above shows a daily graph of the DJIA since April. Note that while a 800+ dip in the average seems extreme, on the overall picture it's barely a small blip. 

More noteworthy for long-term investors is the weekly action of the markets. The chart below is the weekly average of the DJIA since the beginning of 2017. Long-term investors should not panic and stay invested. I assume you have a three to five year plan, with an exit plan built in. If so, there is no reason to change path. If you have some extra cash, look for buying opportunities. But if the trend reverses, have an exit plan. 

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