A lot of us (including me, guilty ) have thrown around the notion that stocks’ recent drop has been a “healthy” one.

What exactly does that mean? Some thoughts

First of all, it’s jargon. And I’m sorry for falling into that jargon-y trap.

Also, you’ll never hear Wall Street call a selloff “sick”, so it doesn’t make a ton of sense?

Anyways, a “healthy” selloff is basically one that was *somewhat* expected/overdue. And it happens in an orderly fashion.

Here are some signs of a “healthy” drop:

1/X

Parts of the market that have done especially well are the hardest hit.

That’s a sign that investors are selectively choosing to sell what’s worked, instead of selling everything they own and hiding under the bed.

Tech was the “profit-taking” sector this time around.

2/X

Stocks look stretched before they drop.

This is a tough one, because what is “stretched” 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.

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 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.

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.

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, it’s 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 don’t want that.

Falling back to reality prevents us from getting carried away.

4/X (and I hesitate to put this bc it’s so hairy right now, but...)

The fundamentals don’t change.

We’re in a tricky environment right now and the economy is far from OK, but it’s *recovering* and the Fed is on our side. That’s been the story up until about now.

We haven’t seen anything seriously break in the economy or earnings like we did back in March (although we have issues, I know). There’s no big fundamental reason to sell stocks *now*.

Just another sign that this drop was a quick, needed step back (vs a concerning slide)

Anyways, that’s my brain dump on “healthy” selloffs

Don’t panic. They happen. Remember your goals/why you’re investing in the first place.

Also, let’s find another word for “healthy”, yeah?