Believe it - sell-offs are a sign of a healthier market in the long run

by Wayne Ferbert on August 20th, 2013

It takes two sides to make any market. You’ve got to have a buyer and a seller. This has been obvious in every bit of commerce in the history of the world. Up until last week, it has seemed like all we had in 2013 were BUYERS!
 
But having 4 straight down days in the market might make you pause a little bit and wonder where the buyers have gone. This is not only normal – but it is part of having a healthy market.
 
In fact, the one thing that was NOT normal was the market taking all the way until August 19th to experience four straight down days. I looked back at the last 15 years to see how long we had to wait to have the S&P500 experience 4 straight down days.
 
The longest we ever had to wait before this year was in 2010 when we waited until May 7th to experience the 4th straight down day. August 19th is a full 3 months longer! In fact, on average, in the last 15 years, by August 19th, there would have been 4 consecutive down days in the S&P500 about 6 times before August 19th, on average.
 
This market in 2013 has been remarkably resilient – probably mostly being driven by the Fed’s buying programs. If you want to ask yourself what is different this time, that is probably the answer. The Fed is driving buyers to risk assets in a way that the prior 15 years just didn’t experience.
 
But in the end, the sell off is a healthy sign. Markets need buyers and sellers with conviction – not buyers and sellers that are being driven to decisions by the lure of ‘cheap money’. The market correction in the face of the likely tapering of Fed buying is exactly what we needed. The sell off is a sign that investors think the Taper is near. We can only really get good price discovery from buyers and sellers that act with conviction. Four straight down days seems like more conviction on the seller side than we have had in a while.
 
This is also good for the tactical point of view for the Buy & Hedge investor. Let’s have this shake itself out and see where the market finishes. When markets move very fast, the Buy & Hedge investor can get whipsawed with the short calls we like to sell. This pull back has helped some of the longer dated calls that we sold earlier this year in the $1650 to $1750 range. More modest upward gains are better for the Buy & Hedge investor – let’s hope the market finds those gains on the back of buyers with conviction.


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