It happens. An outlier event collapses the SPDR S&P 500 ETF (SPY). It could be something as innocuous as an economic report that, at other times, would hardly move the needle. But this is an occasion when patience most often pays, although you may have to wait several days to recover from this slip, notes Hugh Grossman, founder of DayTradeSPY.
First of all, never panic. The worst thing to do is sell, where you will undoubtedly lose the bulk of your capital. Just stay calm. You do have time, correct? After all, you did heed our warnings about always buying time.
Second, find out just what spooked the market. In all likelihood, it was a relatively short-term breakdown. If the S&P 500 is generally in a long-term, stable, upward-trending pattern, then a short-term pullback, even to a deeper support level, may not be indicative of a complete meltdown.
SPDR S&P 500 ETF (SPY)
I find comfort looking back at the hourly charts. Dec. 18 saw SPY tank 20 points in one day. The next day, it rallied slightly but edged lower still. The following three days pushed this stock back to within 99% of the range before it dropped. Your option would not have fully recovered, but perhaps there may have been enough of a move to repair the trade or at least somewhat minimize your loss.
Dec. 27 saw another eight-point slide, only to fully recover five days later. Heading into the new year, Jan. 2 saw SPY collapse 12 points. It not only recovered the next day, but also stretched another seven points higher than before it dropped.
Then there was Feb. 20 and, most recently, on Feb. 24, when SPY dipped considerably lower before retracing somewhat.
One trick is to trade small, trade often. That way, you should never be heavily invested in any one position that could materially affect your overall balance. Hold on for the reversals, which usually occur within a few short days thereafter.
By trading small, trading often, you trim back your exposure and gradually edge up your winners in a longer run. The market is simply too volatile with the Trump Administration at the helm, disrupting any cohesiveness we may have enjoyed in the past. Simply put, too much is happening now for the market to gain any foothold on pricing. And for that reason, it’s best to limit exposure.
