Jeff Bezos lost $1.7 billion in a single day last month.
Mark Zuckerberg fared even worse… He lost $2 billion that same day.
[ad#Google Adsense 336×280-IA]What happened? It’s simple… The stock market tanked.
The world’s most famous stock market index (the Dow Jones Industrial Average) fell around 370 points on May 17. And it sent investors into a panic.
That’s great news. Investors showed us their hands. They showed us they’re nervous. And that fear ultimately means there’s still plenty of upside potential in this market.
Let me explain…
Last month’s one-day fall was extreme.
But Bezos and Zuckerberg can handle the losses…
Bezos is the founder of Amazon (AMZN) and the third-richest man in the world. Zuckerberg is the founder of Facebook (FB) and the world’s fifth-richest man. Between the two of them, their net worth is close to $150 billion.
Even if they lose a couple billion dollars, they can still put food on the table.
Most investors, on the other hand, couldn’t handle it… They got scared. “Panic-based trading” from individual investors hit a record that day.
In technical terms, the move was “two standard deviations beyond normal.” In plain English, it was a panic.
The move wasn’t that big on paper… That 370-point fall was less than a 2% loss. But it shocked folks… Trading has been so sleepy lately that investors panicked. You can see it in their trading activity…
My good friend Jason Goepfert at SentimenTrader reported that on that day, “There was a monster spike in [panic-based exchange-traded fund (“ETF”)] volume, accounting for nearly 8% of NYSE volume, by far the largest ever.”
Jason defines a “panic-based ETF” as one of two types of funds:
- An inverse ETF, or
- A volatility-based ETF.
In short, these funds typically perform well when stocks fall. So when investors fear big downside risk or major volatility ahead, they rush to these kinds of funds.
And that’s exactly what they did last month… During the one-day fall, people traded panic-based ETFs in record amounts. This tells me that investors are twitchy… And they don’t trust this bull market.
Now, you’re probably wondering why we think this fear is a sign of upside potential.
Consider this… What do you think of when you picture the top of a market? I think of unbridled optimism. Market tops happen when investors are no longer scared.
As an example, think about the real estate boom a decade ago… How many people were scared at the peak?
Nobody was scared. Everyone believed that prices could never go down. Everyone believed that house prices could go up 10% or more every year – even when population growth was less than 1% per year.
At the peak, everyone who wanted to buy a house had already done it. No one was left to buy. And so there was nowhere left for prices to go – but down.
That’s what a market peak feels like. Is that what it feels like to you now?
Investors are fearful and twitchy. We don’t have that feeling of euphoria in the stock market at all. Last month taught us that investors are ready to sell at the first sign of trouble.
History also shows that we likely have more upside ahead. Jason has studied other similar moments of panic-based selling going back to 1928… And he found that after panics like Wednesday’s, stocks are typically up two months later, with solid gains and a high winning percentage.
In short, last month’s panic tells us we’re not at a top. Instead, the current bull market has plenty of room to run higher. That’s why my long-term advice on stocks hasn’t changed.
We want to continue owning U.S. stocks now.
Good investing,
Steve
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Source: Daily Wealth