What to do When the Dow Jones Falls 500 Points

02:46 10/10/2018

It’s a great day to be a trader – if you’re short.

At the moment, the Dow Jones is down 520 points, and getting worse. With elections nearing, bond yields rising, and tech stocks retreating, markets are in a state of panic.

The benchmark 10-year Treasury note yield rose to 3.25% and hit its highest level since 2011. The 30-year bond yield also reached its highest mark since 2014. Neither is sitting well with traders. That's because they lead to expectations of tighter monetary policy, which can cap company profits, potential dividends, and throw a wrench into things.

Technically, things don’t look so hot either.

After testing double top resistance, the Dow Jones just fell below its 50-day moving average. Should current support fail to hold, we could plunge to the 200-day at 25,140.

October is truly living up to its reputation as the worst month for the markets.

All three indexes are in the red this month. But the Nasdaq has really taken it on the chin: It has plunged from 8,100 to 7,543. It’s headed straight for its 200-day just under 2,500. Should that line in the sand fail to hold, we could see a test of 7,250, near-term.

But Don’t Panic

Pullbacks are healthy. And we have to remember markets do not just go up in straight lines.

Have Cash on Hand

“Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent,” says Warren Buffett.

Don’t Follow the Herd

One of the key reasons that many investors underperform in the market is because they move in and out of assets at the wrong time. When an investor sees everyone else making money from rising markets, that's when they tend to throw every spare dollar into their investments. Unfortunately, when that same investor sees a group of other investors selling, the investor sells, too.

In short, they get caught up in herd mentality.

A trader will often mimic the actions of a larger group so they don't feel left out of a trend, or miss what the herd believes is a “can’t lose” trade.

The rationale is simple.

It’s unlikely that such a large group of people can be so wrong.

Be in a Strong Position to Capitalize

With cash on hand, Buffett has the financial flexibility to jump on opportunities that popped up. As the billionaire often points out, keeping some cash on hand allows you to take advantage of corrections without having to sell other investments.

Remember that markets are resilient.

Don’t let a pullback chase you from the market. Remember, they’re resilience. Stay put.

This article has been provided by a Chasing Markets contributor. All content submitted by this author represent their personal opinions, and should be considered as such for entertainment purpose only. All opinions expressed are those of the writer, and may not necessarily represent fact, opinions, or bias of Chasing Markets.
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