After last week’s horrific Paris terrorist attack, many had expected markets to fall sharply when they opened for business the following Monday. Sure enough, when the futures opened for trading that Sunday evening we saw prices fall sharply, but they managed to recover and open positively. That led to a massive rally on that day and paced the markets for the rest of the week. In fact, the stock market had its best weekly performance of 2015, the SPX 500 rising more than 3.3%. With all the turmoil, uncertainty and expectation it was truly an amazing feat.
But the market will often do what few expect to happen – it’s just the nature of human behavior to lean heavily to one side due to an emotional response. However, patterns and trends are powerful tools to follow, and if we let them guide us we can see the opportunity ahead that many do not see. On that fateful Friday when the Paris attacks hit the markets were off again sharply for the third time in a week, down six of seven days.
By several metrics and readings, markets were oversold having dropped about 3.5% over that period of time. The last dip of that size was in mid/late September and that followed the massive drop in late August. Every dip is always met with a skeptical eye – is this the one that won’t get bought? Perhaps it was time to take prices up, and sentiment was starting to become sour (a good contrarian indicator), and now the terrorist attacks were sure to cause more selling. As mentioned above, that did not occur.
Historically, stock market drops that follow tragic events are often seen as great buying opportunities. Prior terrorist attacks such as the London train bombing, Madrid bombing, airliner explosions, Paris earlier this year at Charlie Hebdo and even our own 9/11 attack saw markets move sharply lower but then recover ferociously. If one is calm, cool and patient the short term price drop becomes a huge buying opportunity.
In the short term, most invest/trade with an emotional bias, letting fear/greed get the best of them every single time. A steady hand and focus on the bigger picture is often rewarded in these situations. Those who may have sold on the prior week’s dip and did not come back in to buy now find themselves behind the eight ball after a strong week, perhaps asking themselves ‘how and when do I get back in’? The pattern of 2015 has been to buy dips and sell rips. Follow the pattern until it changes.