David Saito-Chung
Wed Jul 20, 7:00 PM ET
The deadly bombings that paralyzed London’s subways on July 7 didn’t derail the rally. The market’s knees, however, have buckled badly many other times in the face of a panic or shocking event.
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The 9-11 terrorist attack destroyed the World Trade Center towers and part of the Pentagon, killing thousands. After being closed for four days, the Nasdaq plunged 18% over the next five sessions.
For some, the occurrence of such events is reason enough to avoid stocks. You can never predict these things, they argue, so why bother?
One key to success is becoming nimble enough to start raising cash at the first signs that the market has topped and a major bear market may be arriving soon.
Veteran investors have found that major disasters tend to take place after the market has already given its clues that the rally is over.
Take 9-11. Before the attack, distribution ravaged the major indexes from late May to mid-June 2001 on the heels of a brief spring rally. Most stocks were falling, many breakouts failed and the market was still in a long-term downtrend. It was the right time to be in cash.
At an IBD seminar held in May this year, a reader asked IBD founder William O’Neil whether he had been caught by a sudden crash in the market. O’Neil replied that he could not recall such a time during his decades of investing experience.
How? By moving into cash and sitting during periods of heavy institutional selling — as seen through charts — you can avoid huge damage to your portfolio.
Despite plenty of disasters, the market has always shown resilience. Why? New companies, new ideas and new investors lead fresh bull markets. Those who ignore the market at its low points miss the chance to capitalize on the next great bull run.
That’s one of the points made by the new chart book «Markets in Motion,» published by Ned Davis Research. It provides sweeping views of the market, economy and historic events over the past century.
«Comparisons across decades demonstrate that history tends to repeat itself, but not in exactly the same way,» Davis wrote in the book’s introduction.
Consider the 1900s, which had its shares of economic recessions and stock-market slides. The Dow Jones industrial average topped at 78 in June 1901 (point 1) amid an economic boom. The market sold off on heavier volume than the previous day for four days in the middle of May that year, a sign that large investors were getting out of the market.
In September that year, President McKinley was shot and killed. A recession began in late 1902 while President Teddy Roosevelt cemented his reputation as a trust buster.
On April 18, 1906, a huge earthquake and fire struck San Francisco, sending the market plunging (point 2). The Dow topped before that, though, with heavy distribution from January through March.
