After the Madness, What's Next?

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Few weeks on Wall Street can match the craziness that last week gave investors. Four days of huge volatility, followed by what seemed like a quiet Friday by comparison with a 125-point jump for the Dow, has everyone on edge.

What's next?
In the aftermath, everyone's looking for answers about what's to come. Poring through all the things that investors did during last week's roller-coaster ride yields many different insights:

  • On the commodities front, hedge funds poured into gold and precious metals, but interest in other commodities like base metals and foodstuffs largely evaporated. In particular, copper saw speculative demand drop by more than 60% for the week, potentially boding ill for big copper producers Freeport-McMoRan (NYSE: FCX  ) and Southern Copper (NYSE: SCCO  ) .
  • After a huge run that sent CurrencyShares Swiss Franc (NYSE: FXF  ) to record levels, foreign-exchange traders put their feet on the brakes, cutting dollar-bear bets by half last week. That may seem surprising in light of the S&P downgrade of U.S. Treasury debt, but the bond market's complete disregard for the downgrade makes it clear that the U.S. won't have trouble with financing its debt anytime soon.
  • Investors fled from emerging-market stocks, pulling out $7.7 billion from emerging-market funds during the week. Given that benchmark ETF Vanguard MSCI Emerging Markets (NYSE: VWO  ) saw an even greater percentage drop last Monday than the S&P, investors seem to figure that economic conditions are just as likely to hurt stocks in places like China, India, and Brazil as they are in the U.S. and other developed markets.

Those markets don't look like they have much in common. But they show one similar feeling among investors across the financial markets: Traders are questioning whether long-held positions that have worked for months or even years will continue to work.

The impossibility of timing
At least at first glance, getting in on a profitable trend early seems like the key to making money in the markets. No matter what market you're talking about -- gold since 2000, oil since the late 2008 commodities crash, or stocks since the March 2009 bottom, just as examples -- you can always point to a trend and play the "what-if" game, thinking about all the money you would've made if only you'd bought early.

But there are several problems with that approach. First, it takes time for those trends to establish themselves; when they first begin, they usually look like extensions of the previous trend. Second, for every trend that establishes itself, you can find several failed attempts on previous occasions. And perhaps most importantly, if you don't understand why a trend exists, then you'll have no chance of correctly identifying when it's time to get out. Latecomers to a dying trend get hurt the hardest.

A better sign of stability
By contrast, long-term investors appear to be mostly staying put, which is a good sign. According to a study from Vanguard, only 2% of its more than 3 million 401(k) customers made any sort of equity trade -- and that number may actually include routine trades that would have occurred regardless of the market swoon.

That's exactly what you'd want to see -- and exactly the advice that Fools gave to many investors during our live chat sessions last week. As hard as it may be to stand still when the world is going crazy around you, it really comes down to one simple fact: If you have a strong investing strategy in place, the worst thing you can do is to jettison it right when you need it most.

Businesses that match up with that philosophy tend to be long-term winners. PepsiCo (NYSE: PEP  ) has spread its well-known products across the globe with great success. ConocoPhillips (NYSE: COP  ) and its strategy to divest non-core holdings and separate its core businesses by spinning off its refinery assets can bring big benefits no matter what energy prices do. And as JPMorgan (NYSE: JPM  ) CEO Jamie Dimon said last week, "We don't run the business based upon what happens in the market in a day."

Don't panic!
Which will you be: a trader or an investor? Different people succeed either way, but for my money, it's a lot easier being an investor. Stick to your guns, and you'll get through this turbulence in one piece.

If you need some good stock ideas to help you do that, look no further. The Motley Fool has five stocks you should look at; this free report explains why the Fool invested its own money in them.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.

Fool contributor Dan Caplinger prefers his madness in March. He owns shares of Vanguard MSCI Emerging Markets. The Motley Fool owns shares of PepsiCo, Vanguard MSCI Emerging Markets, and JPMorgan Chase. Motley Fool newsletter services have recommended buying shares and creating a diagonal call position on PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy will help you from going mad.

Read/Post Comments (5) | Recommend This Article (9)

Comments from our Foolish Readers

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  • Report this Comment On August 15, 2011, at 3:24 PM, OutperformOrDie wrote:

    Interesting article, Dan. I'd definitely align myself with the investor category. Despite all my buddies recommending I short the market, I continued to buy good quality, dividend paying stocks throughout the downturn.

    Despite my best efforts, I can't convince them they'll likely lose all their money in the long run. Guess life experience is the best teacher.

    Fool on!

  • Report this Comment On August 15, 2011, at 6:24 PM, addikt06 wrote:

    Market is bipolar right now and 50% of the transactions are being done by computer algorithms... anyway the jig will be up soon.

  • Report this Comment On August 15, 2011, at 10:56 PM, garifolle wrote:

    The article is indeed interesting, but I can't remember the fool ever saying "get out of this market", so the information content is not too high.

    I really do not appreciate you citing Jamie Dimon:

    in my opinion, this man says things and makes the opposite. JPM had done enough if not illegal (and sometimes yes, illegal), at least pretty immoral. moves. I will never listen to what Jamie Dimon says.

    Last week, on one of those big upward days (DOW + 1.5%), JPM and Morgan Stanley went down respectively -1.25% and -7%: the EU had just forbidden short sales!

    Both have excellent analysts and traders: what does it tell us? They really intended to short as much as they could.

    Maybe "they" do not react on a one day event, but nervous investors do.

    I agree with addik06 that 50% (and it could be more) of the transactions are decided by computers that react in a few ms, on price or on news.

    We have very little chance against them, and when those computers start triggering stops, or buy orders, we can have extreme variations that are hard to understand.

    My own strategy is so that it tells me to stay mostly at cash, and yes do some quick shorts once in a while, or some very short trades.

    I am not in the mood of thinking long term at all: I'll take any profit and cut any loss as fast as possible.

    I do not feel it is panic, I am just sharing most investors feel of uncertainty.

  • Report this Comment On August 16, 2011, at 8:58 AM, rodnog wrote:

    @garifolle @addikt06: Are you saying that, if the automated trading computers were taken out of the equation, then the daily price fluctuations would be easy to make sense out of? I'm far from an expert, but i'm skeptical...

  • Report this Comment On August 16, 2011, at 6:10 PM, garifolle wrote:


    I make a difference between the daily fluctuations and the intraday variations.

    If like yesterday, Google announces that it will buy Motorola, good for Motorola holders. At the same time, RIMM jumps (over 10%) as does Nokia (+17%): one can explain this by the hope that RIMM and Nokia could also be bought. To me this seems excessive, but they are really attractive in their prices, RIMM has put the hand on the famous Nortel patents it wanted so much a few years ago.

    Google had been laughed at with its ridiculous bid in Nortel auction and badly needs Motorola's patents much more then their cell phones.

    This is good for the lucky share holders.

    It has never been really easy to make sense of the "daily" fluctuations, because there has always been, (and will always be), people who will know things before we do, and you can be right to be skeptical.

    "Intraday" fluctuations can be very tricky to analyses, especially when they are not followed by a steady slope.

    You keep laughing at analysts who explain a big positive move of the market when there is possibly no explanation, and by the time their analysis comes out, the market has lost 250 points!

    Then they rush to find another interpretation.

    On a day to day basis, when you see an unusual volume on a stock one day, even if you do not know why, even if the price did not make a big move, you could say exactly that: "Someone knows something that I do not know, but I should watch it". The news could come right after the market close, just before the opening of the next day, or as late as 2 to 3 days later.

    But extreme *intraday* variations (like the famous "flash crash of May 6 2010"), can only be explained by programmed computer that obey in a fraction of second to preset orders.

    (Just google: "May 6 2010 flash crash SEC investigation")

    Those computers do not only react to price, but to quick interpretation of chosen words, (like when the FBI watches email, it looks only for certain words), and are programmed to sell (or to buy) if the news - that they receive a fraction of a second before it comes out - contains those words.

    And then there goes the cascade of triggered stops.

    The May 6 flash crash might be the most famous, but they come up relatively often.

    Not too long ago, I was following about 40 stocks from both Canadian markets and American markets, from very different sectors, and for a few minutes , *all* went down at the same time.

    This lasted but a few minutes, and was not as dramatic as on May 6 2010, although probably lots of people lost money in those minutes (maybe even the owners of those mega computers)

    I did not own all those stocks, but 3 or 4.

    Had I put stops, they would all have been triggered, still worst if they had been stops without a limit, I would have lost a lot!

    A few minutes later, they had almost all come back to their "normal" intraday variations.

    I doubt that the SEC will ever be able to come out with restricting regulations on the automated trading.

    And I do not mean that it could be much easier to make sense of all variations.

    But this sure makes things more difficult for the small short term trader, even the one that follows her/her trades all day long.

    I guess it is less dramatic for long term investors, although some of them also put stops on their positions.

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