Today’s Panic Selling

Posted on May 06, 2010

As you certainly know, the US stock market was in crash mode today, losing more than 8% at some point. I have not seen such panic selling since the top of 2000. The recovery that followed was spectacular as well. Only time will tell if the bear market is back or the uptrend will resume.

I hope that todayhotstocks.com subscribers were not surprised by this (temporary?) downturn as this was absolutely predictable (the downturn, not the panic selling). We alerted our subscribers about it in an email alert sent and posted on our website ( http://www.todayhotstocks.com/latest-trading-alerts/) on March 23. Here is what I said at the time:

“This is just a short update to let you know that we have not added new stocks to our portfolio recently as the market is extremely overbought right now and the odds for a downturn are very high.

The Nasdaq 100 index had 17 up closes during the last 19 trading days and the ‘NYSE New High New Low Indicator’ ($NYHL) made a new high at about 550 points two days’ ago. During this market rally (March 2009 – today), EVERY time this indicator made a new high, it was shortly followed by a maker downturn. Several other indicators we follow show that the odds for a market correction are very high.“

From the time we sent that alert, the market continued to stay on the extremely overbought territory for 3 more weeks, but the inevitable happened. What is important is that at the start of the downturn (April 26), our portfolio was 80% in cash and we were 90% in cash before today’s panic selling.

Why am I writing this? It’s because every time our portfolio holds a significant amount of cash, I get a lot of emails from subscribers complaining that they are paying a monthly fee and do not receive enough buy alerts. During those times, I am under the impression that most of our subscribers will be extremely happy if we issue a record number of buy signals everyday regardless of the returns generated. It is obvious that most people are after the excitement of buying and selling stocks, not after generating positive returns.

If you are one of those investors, you should remember that investing is about making money, not about excitement – making money implies risk management and taking a bet ONLY when the odds are definitely on your side. Sometimes, doing nothing is the best investment decision you can make. The reason we were 90% in cash before today’s panic selling was because the odds were completely against us and the best thing in such cases is to stay in cash.

This is basically how we managed to post great returns both in 2008 and 2009. We will not change our system because of the record number of people that unsubscribe during those times.