Growth investors definitely took it on the chin on Tuesday; we haven’t had a one-day pullback like that since early September 2016. If you own growth stocks, you’re probably left wondering what to do. Here are a few thoughts.
Markets are good at worrying about things, and since the beginning of March, they have taken the cumulative uncertainties of Brexit, the Fed and the political dogfight in Washington pretty much in stride. Up through Tuesday, what we saw in the market was some minor worry about the economic impacts of a divided Europe, rising interest rates and unclear policy in Washington.
But as good as markets are at rational discounting in the face of a crisis, they are definitely vulnerable when uncertainties begin to accumulate. So when the British Prime Minister said that she is going to start the process of getting Great Britain out of the European Union, the Fed raised rates by a quarter point and said that two more rate hikes may be coming this year and Congress heard about Russian election tampering from the head of the FBI and began confirmation hearings for a Supreme Court nominee who will be controversial no matter what he says, markets got really flustered.
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We’ve been seeing evidence of this flustering, of course. Markets began registering higher numbers of stocks hitting new 52-week lows in early March, and the indexes have been marking time since the S&P 500 hit its resounding high on March 1. Here’s what the S&P has been up to, including Tuesday’s 1.24% pullback.
The trading volume spike on Monday was probably a hint that markets were in a mood to go negative. But it’s important to keep this correction in perspective. First, the S&P has only dipped below its 25-day (green line) moving average, and both the 25-day and the 50-day (blue line) moving averages are still in uptrends. Second, while many leading growth stocks were hit by Tuesday’s move, many are still in great shape.
What’s the key to handling a market correction like the one that worried market pros on Tuesday? The most important thing is to watch stocks and make sure you have your loss limits in place. Don’t let your worrying about the market push you to make a premature exit. But also don’t let wishful thinking keep you in any individual stocks that hand you losses. It’s always a good idea to know which way markets are headed, but it’s the action of the growth stocks you actually own that will make or break your results for the year.
So keep an eye on those critical 25- and 50-day moving averages, and if the S&P 500 and other major indexes do actually dive below them, you can shift to a defensive stance and start the process of raising cash and putting your growth stocks on shorter leashes.
Just remember to react to the reality of what the market is actually doing, not what you hope or fear it might do.
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