The month of July (and now August) must have been the worst nightmare for advisors who recommend market timing (otherwise known as tactical asset management) as the investment method of choice to their clients.
Market timers, of course, have to be right two times - they try to predict not only when to get out of the market, but also when to get back in. This is an impossible task during normal times, and doubly so last month.
Of the 20 days in July when the stock market was open, we've had 7 "up" days, and 13 "down" days. The best daily gain for the Dow Jones Industrial Average (DJIA) was on Tuesday, July 19, when the index was "up" 202 points. The worst drop happened on Wednesday, July 27, when the DJIA lost 199 points.
The last six trading days of the month were "down." Panic was beginning to set in. Many advisors and investors reacted by doing the exact opposite of what they should have done. They sold "low" and locked in their losses.
Of course, many analysts correctly attribute this market volatility to the failure of Washington to come to an agreement on the Debt Ceiling. This failure caused our Country's pristine credit rating to drop.
Many of you have heard me say time and time again that "all knowable and predictable information is already included in the price of a stock. It is only unknowable and unpredictable information that causes a stock to rise or fall." I believe that, until the past few weeks, the Wisdom of the Masses fully expected Washington to reach an agreement, and that agreement was already priced into the stock market.
But the lack of clear leadership from Washington has created continued uncertainty. This is something that the Masses did not anticipate and did not expect to be so politically centric. It was unknowable and unpredictable, so the market is seeing above average volatility swings.
Remember, there has always been a market recovery - 100% of the time. And that recovery usually happens in a fast and furious manner.
Below you will find a 4 minute video from Fox Business last Thursday:
“Market Volatility Leads to Big Investor Mistakes”