Is There a Buying Opportunity to Be Had?

Millions of investors watched Thursday as the Dow Jones Industrial Average rapidly sank 600, 700, 900 points. Before we all lose our heads and make things worse, let’s put things into perspective, shall we?

The New York Stock Exchange has denied that trader error contributed to Thursday’s near 1,000-point loss in the Dow. According to several people, a trader may have mistakenly entered “billion” instead of “million” in a trade involving Procter & Gamble (PG). The result was a nasty-looking chart like this one:

click to enlarge

Trader error or no, the markets have been less than healthy this week. So far this week, the Dow has lost 5.8%. The S&P 500 has fallen 6.5% and the Nasdaq has declined 7.7%.

But despite these losses, all the major indexes remain well above their long-term trend lines.

The fact is that the oil spill in the Gulf, the protests in Greece and the various things going wrong in the world right now have little to do with the broader economy. The markets are clearly frightened, but we need to step back and look at the big picture and not get swept up in the at times intense emotional aspect of what’s taking place. Greece is 2% of the eurozone’s GDP – the troubles there should not have an outsize impact on the market.

The U.S. economy, while it still has its challenges, is doing much better than it was just six or 12 months ago:

• The fact is that this most recent earnings season has been a successful one: 77.8% of companies have beaten expectations so far. It’s better than fourth-quarter earnings season, which was also considered to be a solid one.

• Jobs growth is slowly returning. Thursday’s jobs report showed that 32,000 private sector jobs were added last week; economists expect that tomorrow’s jobs report will show growth between 180,000 and 189,000.

• Retail sales are rising, productivity is improving and consumers in general are feeling better.

What Thursday’s pullback may mean for investors is an opportunity. Despite the losses, the S&P 500 (and other indexes) are still above the all-important long-term trend line:
Many investors sat out the market’s rally, and they’re still sitting on the sidelines looking for an entry point. If you’re one of them, consider this your chance to get in – just have a stop-loss point in the event of further losses or volatility.

If you’re still in the markets and concerned about what happened today, be prepared to use a stop-loss strategy to protect yourself. You can read more about our discipline and how it works here.