The Brexit decision, a shock to markets, saw an immediate sea of red, as the sell-off kicked in. And while Mr Market is an extremely temperamental child, Dwaine van Vuuren does a quick examination as to why panic usually costs investors dearly. Some useful historical analysis, which highlights the thought that when others are selling, it’s usually a good time to be buying. – Stuart Lowman
By Dwaine van Vuuren*
With a surprise vote for Britain leaving the EU, markets, currencies and commodities plummeted. Panic selling was in full force, with our own JSE down 6.84% peak-to-trough from yesterdays high to today’s panic low.
The chart below shows peak-to-trough one day draw-down occurrences on the JSE TOP40 exceeding 3% since our bull market commenced in early 2009. Red dots are shown on the J200 when these occurrences exceed 5%
It is evident that these occasions normally occur very close to ground zero of a correction, and we enjoy sustained gains shortly thereafter. So, presuming we are still in a bull market, the large majority of these occasions are buying opportunities and not selling ones.
It is possible for the markets to go down another 1-2% after these occasions, since volatility is high. However you can conclude that most of the downside is behind you and if you budget for a 1-2% further loss you invariably end up for the better after a few weeks/months have past.
Large scale panic climax selling is very good at pinpointing market bottoms. All the weak hands are flushed out the market. Those cast-iron stomachs that remain with their positions are in no mood to sell and with the last of the sellers gone, there is only one way when all the short sellers have to buy to cover their positions – up. After the short-cover rally, the technicals and charts all look a lot better and start attracting regular buyers back again. Since sellers are few, the demand/supply equation results in pricing rising.
- Dwaine van Vuuren has a BSc(Hons) degree and is a full-time trader, global investor and stock-market researcher. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT.com and PowerStocks.co.za into companies used by hundreds of hedge funds, brokerage firms, financial advisers and private investors around the world. He now also heads up Research at Sharenet. A gifted educator, he’ll have you trading and investing with confidence & discipline. You can see Dwaine on his regular national roadshows by booking sharenet.co.za/events.
