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A lot of us (including me, guilty 
) have thrown around the notion that stocksâ recent drop has been a âhealthyâ one.
What exactly does that mean? Some thoughts
) have thrown around the notion that stocksâ recent drop has been a âhealthyâ one.What exactly does that mean? Some thoughts
First of all, itâs jargon. And Iâm sorry for falling into that jargon-y trap.
Also, youâll never hear Wall Street call a selloff âsickâ, so it doesnât make a ton of sense?
Also, youâll never hear Wall Street call a selloff âsickâ, so it doesnât make a ton of sense?
Anyways, a âhealthyâ selloff is basically one that was *somewhat* expected/overdue. And it happens in an orderly fashion.
Here are some signs of a âhealthyâ drop:
Here are some signs of a âhealthyâ drop:
1/X
Parts of the market that have done especially well are the hardest hit.
Thatâs a sign that investors are selectively choosing to sell whatâs worked, instead of selling everything they own and hiding under the bed.
Tech was the âprofit-takingâ sector this time around.
Parts of the market that have done especially well are the hardest hit.
Thatâs a sign that investors are selectively choosing to sell whatâs worked, instead of selling everything they own and hiding under the bed.
Tech was the âprofit-takingâ sector this time around.
2/X
Stocks look stretched before they drop.
This is a tough one, because what is âstretchedâ in these days of Fed intervention?
Stocks look stretched before they drop.
This is a tough one, because what is âstretchedâ in these days of Fed intervention?
One big tell: the day before the selloff began, the S&P 500 closed *16%* above its 200-day moving average, a line some experts look at to gauge the long-term trend of the market. That was the biggest spread since 2009.
In other words, the market had run too far, too fast.
In other words, the market had run too far, too fast.
On a related note, 3/X:
Stocks gravitate towards the moving averages in the selloff.
So far, the S&P 500 has dropped, bounced around its 50-day moving average a few times, dropped some more, and ultimately stopped at the 100-day moving average.
That's a sign of order.
Stocks gravitate towards the moving averages in the selloff.
So far, the S&P 500 has dropped, bounced around its 50-day moving average a few times, dropped some more, and ultimately stopped at the 100-day moving average.
That's a sign of order.
Stocks bouncing off the moving averages also shows that there's some buying interest at modestly lower levels.
You want that. It shows the market rallied a little too far, but that investors are still interested in stocks' prospects to buy in.
You want that. It shows the market rallied a little too far, but that investors are still interested in stocks' prospects to buy in.
4/X
A shift in mood (sentiment)
Did you feel a little too giddy in August? Be honest. A lot of investors did. That selloff probably hurt a little, too.
A shift in mood (sentiment)
Did you feel a little too giddy in August? Be honest. A lot of investors did. That selloff probably hurt a little, too.
Steps back in the market happen from time to time, even in years-long rallies.
The S&P 500 has averaged an ~8% return annually since 1950. But over that time, itâs endured 22 drops between 10-20%, and 10 drops of 20% or more (bear markets
)
The S&P 500 has averaged an ~8% return annually since 1950. But over that time, itâs endured 22 drops between 10-20%, and 10 drops of 20% or more (bear markets
)
Those big drops typically happen when we get a little too 
and everybody starts buying the same things without really doing their homework/giving it a second thought. You donât want that.
Falling back to reality prevents us from getting carried away.
and everybody starts buying the same things without really doing their homework/giving it a second thought. You donât want that.Falling back to reality prevents us from getting carried away.
4/X (and I hesitate to put this bc itâs so hairy right now, but...)
The fundamentals donât change.
Weâre in a tricky environment right now and the economy is far from OK, but itâs *recovering* and the Fed is on our side. Thatâs been the story up until about now.
The fundamentals donât change.
Weâre in a tricky environment right now and the economy is far from OK, but itâs *recovering* and the Fed is on our side. Thatâs been the story up until about now.
We havenât seen anything seriously break in the economy or earnings like we did back in March (although we have issues, I know). Thereâs no big fundamental reason to sell stocks *now*.
Just another sign that this drop was a quick, needed step back (vs a concerning slide)
Just another sign that this drop was a quick, needed step back (vs a concerning slide)
Anyways, thatâs my brain dump on âhealthyâ selloffs 
Donât panic. They happen. Remember your goals/why youâre investing in the first place.
Also, letâs find another word for âhealthyâ, yeah?
Donât panic. They happen. Remember your goals/why youâre investing in the first place.
Also, letâs find another word for âhealthyâ, yeah?
