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The Day the Stock Market Shook the Earth: Takeaways From the Dow’s 1,000-Point Drop

Stock-Markets / Stock Markets 2015 Aug 30, 2015 - 06:09 PM GMT

By: Investment_U

Stock-Markets

Matthew Carr writes: I was working from home that day.

My wife had just had surgery, and I was caring for her as she recovered. I was sitting in our main floor living room, answering emails. My wife was on the couch downstairs, watching TV.

All of a sudden, our dog Chloe came running into the room. She jumped up on the couch next to me and started licking my face. Seconds later, the house started shaking.


There was a low, thundering rumble. My wife called, “Is it just the drugs? Or is the whole house shaking?”

I yelled, “Earthquake!” grabbed her and ran outside into the yard. This was August 23, 2011.

I’ve lived in a lot of different parts of the country, including California. But I’ve experienced only two earthquakes. And they were both in Maryland.

This particular earthquake wasn’t devastating by any means, but it was still unnerving. After all, we're not supposed to have earthquakes here. It frayed people’s nerves. There was even a big momentary drop in the share price of East Coast power plants that day.

Yesterday, almost four years later to the day, the Earth shook again. Only this time, even more nerves were rattled... because this quake originated from the market, with an epicenter on the other side of the world...

The New Black Monday?

Remember Black Monday? I’m talking about October 19, 1987, when the Dow Jones Industrial Average lost 22.6%.

A whopping 508 points.

Yesterday, the Dow opened down more than 1,000 points after Chinese markets collapsed 8.5%. The panic was swift and widespread. The Nasdaq opened down 9%. Tech stocks got obliterated.

If you were a day trader, yesterday was a gift. And if you got in early - when the bleeding was the heaviest - you were up substantially by lunchtime.

For everyone else, Monday was frustrating, if not insane. The destruction was early... and momentary. The intraday spreads on some stocks bordered on criminal.

An hour after the opening bell, my officemates and I found ourselves saying silly things like, “Hey! We’re only down 500 points!”

On any other day, being down 500 points would be concerning. But yesterday was just plain ridiculous, trending toward absurd. It felt like the heaviest pressure - which took place early - was simply a ploy to take out the little guys... to trigger stops, buy large chunks at lows and profit.

As the morning wore on, the mood in my office turned from playful to sour - I’ll admit, more than one expletive was uttered - as we dove into various stocks, in complete awe of the spreads.

For instance, Apple (Nasdaq: AAPL) hit a 52-week low of $92 in early trading. Then, by 11 a.m., it was down only modestly, sitting above $104.

Skyworks Solutions (Nasdaq: SWKS), one of my favorite semiconductor stocks, tumbled to $70.87. But it was back in the green by 10:30 a.m., up 3% and surging as high as $84.80.

From low to high, that was a gain of 20%.

Biotechs had some of the most ridiculous moves of all. Tetraphase Pharmaceuticals (Nasdaq: TTPH) hit a low of $27 at 9:37 a.m. It was down 34.3% from where it closed on Friday. By 9:44, it was at $36.72.

By 10:30, it was at $39.82. That’s a gain of 47.5% off the morning low.

Stick to Our Principles

The real negative on days like Monday - when the wounds seem deep at first but ultimately turn out to be nothing but scratches later in the day - is that stop losses and trailing stops are questioned.

Just like during the “flash crash” in May 2010, stops were triggered yesterday, pushing investors into cash. Reader Brian commented, “The market gapped down, my positions liquidated, then the market corrected (within minutes)... I think you should address this issue with your readers ASAP. I am SURE I am not the only one who took this hit today.”

There’s no denying it: It does stink when something like this happens. But what you need to understand is that Monday was historic. It’s extremely rare that the Dow opens down nearly 1,100 points - then ends the day in the red a more digestible 400 points.

Protective stops - whether you’re using a trailing stop or a hard stop - are there to take emotion out of the equation. To protect yourself from a market disaster. And in the vast majority of cases, they will work in your favor.

But in rare moments like yesterday, stops may get hit that you’ll lament.

August Is a Grump of a Month

Yesterday, we had one of the largest single-day losses ever. Combine that with Friday’s 530-point drop - which ranks among the top 10 moves lower - and you have a lot of investors understandably on edge.

But let’s think about August 2011, the same month as that legendary earthquake that shook my house.

On August 4, 2011, the Dow lost 512.76 points...

Four days later, on August 8, 2011, it tumbled 634.76 points...

And on August 10, 2011, the Dow lost another 519.83 points.

Out of the top 20 largest daily point losses in the history of the market, six have happened in the month of August. (That’s 30% of all historic collapses.) Four took place in September. Five happened in October - including Black Monday. And three were in November.

The remaining two? April 14, 2000, and December 1, 2008. We data junkies call those “outliers.”

Over the last six years, August has earned a reputation as a notoriously volatile month. Because, in addition to all those drops, two of the largest point gains in history were on August 9, 2011, and August 11, 2011 (the days after historic one-day collapses).

It’s all right to be nervous. And if you were stopped out of some plays prematurely on Monday, you have my sympathy. But as I said, this was an extremely rare occurrence. It doesn’t negate the fact that you must protect yourself and be disciplined.

If anything, now is the time you should be hunting for opportunities, zeroing in on those companies that are oversold.

Good investing,

Matt

Source: http://www.investmentu.com/article/detail/47249/day-earth-shook-lessons-from-dow-1000-point-drop#.VeMpNk3bK0k

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