Stay Small and Move Slowly
Over the weekend, all the talking heads and media types were talking about how bad the market has been this year. To hear the discussions, you would think we had experienced a major crash in recent weeks. I do not want to whitewash it in any measure, but the truth is that, so far, the market has not been so terrible. For the past 52 weeks, the stock market has returned about 8%. Year to date, it is down just about 5.5% and roughly 17% below the highs for the year. That's not wonderful, but it's not crash territory just yet either. A really bad market has peak-to-trough drawdowns of greater than 40% such as we saw form 2000 to 2003 and 2007 to 2009. That's a bad market. There is still a good chance that we will see a really bad market develop as the economy struggles and Europe implodes, but we are not there yet.
I am not seeing the type of one-year plunge in prices that would constitute a really bad bear market yet either. Several years ago, Charles Brandes released a study about catching stocks that had fallen 60% or more in value. The study by the Brandes Institute found that these stocks outperformed the market by a substantial amount for the three years or so after the decline. When you look inside the numbers a bit, it appears that on average there were about 95 stocks per year on average that had market caps larger than $100 million and had fallen by at least 60%. Right now, there are 96 stocks that fit the definition of a fallen knife, so it is not exactly at the extreme levels that would indicate a bear market bottom....311 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.
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