How deep the stock market correction will be this September
September still maintains its reputation of being the worst month of the year for the stock market. Since the beginning of this month, the Dow Jones had only seven wins during 19 trading days. To put it differently, a trader will have a 63% chance of success if he was betting against the market every day.
If a trader had bet against the SPY and QQQ; he would respectively have 63% and 62% wins during the past 19 trading days. While market sell-off is the new norm during September, many investors are still looking into a market correction.
As of September 28, 2021, the Dow Jones, S&P 500, and Nasdaq respectively closed at -569.38 (-1.63%), -90.48(-2.04), and -423.29(-2.83).
Nasdaq was one of the biggest losers today. The last the stock market experienced such a sell-off from Nasdaq was on March 18, 2021; When the index dropped 3.02% in one day.
How do you determine the monthly performance of an index?
The monthly performance of an index is the difference between the closing amount on the last trading day of the month and the closing amount on the last trading day of the previous month. If the difference is positive, we have a bull month. In the opposite situation, it is considered a bear month.
For instance, during August, SPY opened at 440.34 and closed at 451.56. And the Dow Jones Industrial Average Index opened at 34968.56 and closed at 35360.75. As a result, the month of August was considered a bull month.
What will become of September? On Tuesday 28, September 2021; Dow Jones, S&P 500, and Nasdaq closed red. For September to become a bear month, the Dow has to be below 35387.55 on the last trading day of September. And S&P 500 has to be less than 4531.57.
Since the beginning of this September, Dow, S&P 500, and Nasdaq respectively dropped 2.99%, 4.03%, 3.74%. One must remember that market is considered a bear market when it experiences more than a 20% drop. Here are the table of Indexes and price at a certain level of correction.
What to do when the stock market is too high?
An investor should always consider at least 20% cash in his portfolio, diversified his portfolio across industries and sectors. The market is unpredictable which is why it is essential to hedge each investment. A combination of fixed income and equity income can be a solid investment strategy for someone who is looking to gain extra income and take advantage of market fluctuation.
Having 20% or more cash in an investment account gives an investor the opportunity to cost average down. Therefore, he can act on an investment opportunity while waiting for the settlement of the bank transfer in his brokerage account. It will also reduce the risk of a margin call if the overall market drops more than 20%.
Portfolio diversification is one of the keys to reducing risk. It can be very tempting to invest everything into one company because an investor believes in the company. However, regardless of the knowledge an investor holds, he should also understand that the market has other participates such as Market makers, brokerages, hedge funds, and institutional investors. Each participant has a different interest to invest or bet against the company.
Today, September 28, 2021, the Nasdaq and S&P respectively dropped 2.04%. and 2.83%.
For example: For a $10.000 portfolio, an investor will 20% cash can be set up as follow:
You will notice the market value dropping 20%. However, the account value only dropped only 16% because of the cash of $2000. It will also give a warning sign to an investor about the risk of a margin call.
This is one of the many examples, having at least 20% cash at all times can help reduce risk and opportunity cost.
Note: The market is unpredictable, involves significant risk, and it is not suitable for all investors. An investor must talk to a financial advisor before any investment. This article reflects only the opinion of the writer and it is not investment advice.