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: How Markets Respond To Crisis, by D. R. Barton, Jr.
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How Markets Respond To Crisis
by D. R. Barton, Jr.
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“It demands great spiritual resilience not to hate the hater whose foot is on your neck, and an even greater miracle of perception and charity not to teach your child to hate."
— James Arthur Baldwin quotes (American Essayist, Playwright and Novelist, 1924-1987)
Our thoughts and prayers are with those who have been impacted directly or indirectly by the terrorist attacks in Paris over this past weekend. It’s nearly impossible to wrap my head around something that seems so pointless. So disturbing. So wrong.
I take solace in the resilience of the French people — and in the kindness of those reaching out to help. I know also that a small, radical faction of extremists can do nothing except heighten the resolve of free people everywhere to live, to love and to make this world a better place.
As we ponder the ugliness of these events, we can take great comfort in the robustness of the human spirit. This form of resilience is reflected in how markets react to global crisis events — as we shall see in a moment.
Markets’ Reaction to Tragic Events
It probably comes as little surprise that markets tend to bounce back quickly after tragic events. This knowledge undoubtedly weighed on Warren Buffet’s thought process when he talked with CNBC on Monday of this week:
So Warren Buffet’s vote of confidence is supportive and comforting, but let’s look at some number from several people who published data just after the terror attack.
The Numbers Say Terror Doesn’t Pay
One of the reasons often given for terror attacks is that they disrupt economic activity and weaken the attacked party in the process (e.g. the 9/11 attacks). Look, however, to see how long it took for markets to recoup declines after terror attacks since 1992 —
For a larger image CLICK HERE.
You can see from these intriguing data (put together by LPL from FactSet numbers) that of these 19 events, in only two cases did the market require 10 or more days to recover the initial losses that occurred after the event. Indeed, 14 of the 19 events saw the markets recover in only 1 or 2 days!
Note to terror organizations: this strategy does not work and never has worked. The data show that any post-terror attack decline in the markets is actually quite fleeting.
The French and their supporters didn’t let it happen this time either.
Amazingly, following the worst terror attack on European soil in a decade, the French CAC 40 index opened down only 1.1% and gained essentially all of that back in Monday’s trading. Resilient indeed…
Market Reactions to Other Major Tragedies
One of the financial bloggers that I follow is Eddy Elfenbein. He’s thoughtful (and also a good Twitter contributor). I don’t necessarily see eye-to-eye with his long term buy-and-hold philosophy but none the less, his article this week had such good information that I’m including a portion of it here verbatim:
Think back to some of the major political or personal tragedies of the last 75 years. In most cases, the market rose for several days after the unexpected, tragic event. Here is a list of our darkest days:
1939: Hitler invaded Poland on September 1, 1939, launching World War II with shocking speed, reaching Warsaw within a week. September 1 was the Friday before Labor Day weekend, so how did the market fare when it re-opened? On Tuesday, September 5, 1939, the Dow rose 12.87 points (a massive +9.5% daily rise). In the first half of September 1939, the Dow rose a near-euphoric 14.6%.
1941: After a surprise attack on Pearl Harbor, the initial market reaction was surprisingly mild. After the Sunday morning attack of December 7, 1941, the Dow declined less than 3% on Monday, December 8 (falling from Dow 115 to 112), but then the market stayed remarkably level over the next two months, dipping briefly below 100 in April, then resuming its inexorable rise during the rest of World War II.
1962: In the week of October 22-26, 1962, the Cuban Missile Crisis brought the world to the brink of annihilation, but the stock market stayed surprisingly calm, falling less than 1% for the week, then rising strongly (+3.5%) in the two days after the threat faded. The much bigger collapse in 1962 came in the spring, when the market fell 28% after President Kennedy launched a verbal war with U.S. Steel.
1968 brought two more tragic assassinations, on April 4 (Martin Luther King, Jr.) and June 6 (Robert F. Kennedy). King was shot on a Thursday evening, spawning riots in dozens of cities. The Dow fell less than 1% the next day. The Dow rose 2.15% on the following Monday and 4.6% for week after King’s death. After RFK’s death, the market fell just 1%, but then erased that loss in the next few trading days.
1986: On January 28, the explosion of the space-shuttle Challenger on a sunny Tuesday morning had no impact on Wall Street. The market gained 1.2% that day, and it kept rising the next day, week and month.
2001: The attack on America on September 11 was targeted at our financial heart, so the market fell sharply when it re-opened the following week, but it’s important to remember that America was already in the midst of a recession and a bear market when that attack happened. Still, the market reached its September 10th levels within two months, on November 9, 2001, and it kept rising into the spring of 2002.
There have been other major global events that rocked markets not covered here including the trifecta of horrible that hit Japan on March 11, 2011 — the earthquake, tsunami, and the Fukushima nuclear plant failure. As the uncertainty about Fukushima grew, the market took several days to bottom but prices were back above pre-disaster prices within only six trading days after the earthquake struck.
I could go on and on but the history is quite clear: market participants (us humans) are quite the resilient lot and it only follows that the markets in which we trade and invest reflect this resiliency.
As America gets ready to set aside next Thursday to show our gratitude by celebrating Thanksgiving, be sure to remember those who were devastated by the events in Paris and the senseless suicide bombings in Beirut a day earlier. As long as each one of us strives to support the good, the darkness shall not overcome us.
I’d love to hear your thoughts and feedback — just send an email to drbarton “at” vantharp.com. Until next week…
About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured analyst on Fox Business’ Varney & Co. TV show (catch him most Thursdays between 12:30 and 12:45), on Bloomberg Radio Taking Stock and MarketWatch’s Money Life Show. He is also a frequent guest analyst on CNBC’s Closing Bell, WTOP News Radio in Washington, D.C., and has been a guest on China Central Television — America and Canada’s Business News Network. His articles have appeared on SmartMoney.com MarketWatch.com and Financial Advisor magazine. You may contact D.R. at "drbarton" at "vantharp.com".
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I have been listening to Trading Beyond the Matrix as I work and reading Trade Your Way To Fin. Freedom. I wanted to thank you for sharing your spiritual approach to trading, I have since begun a huge amount of internal reflection through the recommended exercises and even in a short period become somewhat enlightened to the extent of the clutter behind the curtains so to speak.
I discovered trading purely through awareness after working with Access Consciousness methods for clearings and creating more consciousness. I am finding these clearings to be very effective in working with the exercises you have provided.
To avoid taking any more of your time, I simply wanted to express my gratitude your chapters relating to your relationship with Durga inspired me and I have begun a quest back into spirituality. I was brought up in a Christian Religion however I rejected this because I did not believe in the god they were putting their faith in.
I have taken a massive step back from my trading and begun to look to the charts inside me, rather than the charts the market has to offer. I see undeniably the connection between consciousness and success.
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Success and Your Time
by Van K. Tharp, Ph.D.
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"Work hard and you’ll be rewarded."
"Do a lot of research, pick the right stocks, and you’ll become rich."
Both of those axioms sound simple and a lot of people want you to believe them. Such phrases, however, have nothing to do with real success — in the markets or in life.
My wife is currently taking a course. She studies for hours and hours to do well on each test. I remember being in that same situation some years back but my approach was different. I would have studied probably for about an hour the evening before the test and I would have gotten an A. Is that because some people don’t have to study hard to make good grades? Perhaps. My wife thinks so when she says, "I’m not you. I have to do things differently." I also suspect that our unique approaches and results have to do with more than just the amount of time we spend on something.
Much of the difference comes from how effectively we use our time. I have always been incredibly good at grasping the structure of things so whenever I studied anything, I made sure that I mastered the structure of what I was learning. Understanding that structure meant that I could then answer almost any question relating to the subject.
If you don’t master the structure and instead just try to learn everything, I think that strategy (working long and hard) is quite ineffective. These comments actually have nothing to do with my wife’s study habits. Rather, they have everything to do with how you use your time for your pursuits and what kind of results you generate. For example, traders/ investors who use their time effectively are more likely to spend less time “working” and they are more likely to be profitable. What does that look like? Based on my work with many similar kinds of people over many years, here are two fictional but realistic examples.
Geoff Carter was a typical investor who spent 22 hours each week on average working at his investing role. What did he do during those 22 hours? First, he read carefully about 15 weekly newsletters and compiled lists of all the stocks that were recommended. Then he studied each stock’s price chart and each company’s fundamentals. From that research, he picked the stocks he liked the best and invested in them. Somehow though, if Geoff bought them, they seemed to go down.
On the other hand, Megan Smith was an atypical investor. She averaged only 6-7 hours each week on her trading/investing but Megan almost always made money.
Each week Megan ran a computer scan for the most efficient stocks. When the market was doing well, she scanned for the stocks that were going up the most. When the market was doing poorly, she scanned for both the stocks that were going down the most and for those that had the most value. Manually scanning stocks with her criteria might have taken many hours each week but her process didn’t take more than fifteen minutes because her computer did the work for her.
Based on her weekly scan, Megan bought the stocks that were most efficient. (One way to do that would be to use the Market SQN® score to compare stocks.) Once she bought a stock, she kept a trailing stop exit order on it. At the end of every trading day, Megan ran a spreadsheet on her positions and compared the closing price for that day to the high for the stock from the time she’d entered the position. She was quickly able to determine if any of the stops needed adjustments. This process didn’t take much more than ten minutes per day because her computer did most of the work for her.
Sure, Megan occasionally had a stock that went down and hit her initial stop but the most she ever lost on any one position was 1% of her equity. She fully understood that her position sizing strategy was the most important systematic factor in her trading to meet her objectives.
Thus, Megan spent about fifteen minutes each weekend running her stock screens and around fifteen minutes each evening updating her account — all which totaled maybe ninety minutes per week. So how did Megan spend the rest of her “investing/trading” time of 6-7 hours per week?
She spent those other hours working on herself by doing the following —
- She made sure she spent about a half hour each day on the top tasks of trading doing her self-analysis, mental rehearsal, daily debriefing, gratitude, and the other tasks.
- She spent an hour each weekend thoroughly reviewing her results for the week asking herself, “How could I have done better? Where can I improve?”
- She was constantly scanning books and magazines looking for more effective trading ideas that she could easily implement.
- Every quarter, she reviewed and updated her business plan.
- Every quarter, she also reread one or two of the volumes in the Peak Performance Home Study Course and redid the exercises in them.
So it’s not the amount of time that you spend on your trading/investing that makes you money. It’s how you spend your time that’s all important.
Editor’s note: This article was originally published in Tharp’s Thoughts on September 25, 2005.
About the Author: Trading coach and author Van K. Tharp, Ph.D. is widely recognized for his best-selling books and outstanding Peak Performance Home Study Program—a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at www.vantharp.com. His new book, Trading Beyond The Matrix, is available now at matrix.vantharp.com.
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In the six minute video below, Ken analyzes several trades from the relatively quiet session on Monday, October 12. He opens with a swing trade that started last week on XIV talking about the entry, initial stop, target, and progress of the trade so far. That swing trade offers the opportunity trade XIV intraday with some confidence in the long bias. Ken provides two tradeable intraday scenarios for the XIV move during the Monday session and the position sizing ramifications for each. Ken then discusses a second trade where one of the traders in the chat room went short USO and earned a couple of R for the effort.
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November 18, 2015 #760
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