Look, it happens. Stocks rally too far and we get a reversal where the market abruptly switches and likes everything it hated and vice versa.
Today's one of those days.
When you see a day like today you get people who will come out of the woodwork and say it is over, with "it" meaning everything that's worked. You are going to get commentary that says "anything that's expensive is out, and anything that's cheap is in."
I expect that there will be plenty of people today who said "I told you so." They are going to make you feel like an idiot if you even own stocks. They are going to say, "you see, this is 2000 all over again. It could be even 1928."
So what do you do? What's the right path? Do you join the panic and get out of the stocks that are cascading down? Do you say "get me out of here?"
No. Here's what you do. You take a deep breath and you say to yourself, "remember that stock that I said I wanted to buy if it ever came down?" You say "Look, the market's been up for a long time and I said if it ever got hammered I would do some buying?"
That's what this selloff is about. It's about taking a hard look at what stocks got away from you and deciding that you want to get in during this sale" but you don't want to get in all at once because you know that the negativists will seize on this day as the top and beat it into your head that stocks are finished.
They will do so by presenting this selloff as the beginning of the biggest correction in history. They will talk about outside and island reversals. They will say that the market is rolling over. They will identify that the stocks that have run the most are the worst and the stocks that haven't run at all represent value.
They will tell you that the best acting stocks are the ones that are just like the dotcoms of 2000 and will crush you. They will point out that at the top in that period there was a dramatic switch out of what was doing well -- the red hots I used to call them -- and into the plain old S&P names.
They will have plenty of ammo and plenty of fellow travelers.
Against that they will point to Nvidia (NVDA) , the hottest semiconductor company that is selling off heavily. They will bring up the stock of Lam Research (LRCX) , which is on Mad Money tonight, as an example of a big earnings beat where it doesn't matter. They will focus heavily on the decline in Alphabet (GOOGL) and the reversal in Facebook (FB) from being up big.
They will never mention that unlike 2000 the leaders are profitable and strong and doing well. That wasn't the case back then. They will not mention that their price to earnings ratios are reasonable given their earnings. They will just make you feel like a chump for liking them.
And the fellow travelers? They are going to be all over the place saying that it's so obvious that things are off the rails.
There, unfortunately, they have an issue. The rails, as well as the rest of the transports have been acting horribly and that's something that is worth noting. You know that I believe the transports have to be strong to have total faith in a rally. The action in the transports, whether it be the truckers, the freight forwarders or the airlines is awful.
It's a real worry and it's something I don't have a rebuttal to. They do act awfully and I would like it very much if they would somehow be able to find a level where the selling is over. I had pinned my hopes on a transport comeback on Southwest Airlines (LUV) and on United Parcel (UPS) but both failed to deliver pleasing numbers. Southwest seems to have put on some fuel hedges that backfired. United Parcel was humble in its outlook. Either way they sure weren't saviors.
All that said the selling has been relentless in the group and I think it is getting overdone.
So why not just plunge in all at once and buy your favorites that you missed on the way up?
Here's why I advocate going slow and doing staged buying.
First, the momentum of a selloff is always strong and tends to last three days. On day one the stocks that have been flying up the most get taken down to earth and then some. Today is certainly day one.
Then, on day two, today's falling knives fall some more and you have to be sure that you don't get stuck. In the meantime other stocks that haven't done well until today -- the year's losers so to speak -- stop going higher. It's a Friday, trading will be light, so it wouldn't shock me if that exacerbates these moves.
I like, in the middle of day two, to pick my spots and buy the stocks that I want that have been on my shopping list. I don't buy all at once particularly on a Friday.
On day three the hottest stocks stabilize and start going higher. The stocks that started selling off on day two run out of gas on the downside. The stocks that started rallying today start to go down again.
So, let's go through the life cycle here. Let's pick a stock of a company that just had a good quarter. Let's pick Advanced Micro Devices (AMD) .
First, AMD reported a much better than expected, genuine surprise quarter on Tuesday. It opened up big today, at $15, a new high. It then proceeded to get pummeled for the rest of the session, periodically trying to make a stand and failing.
Now my playbook, of course, can be wrong, but the pattern would be that tomorrow AMD opens flat to lower and then continues to go down. Remember the winners are in sell mode on day two because the papers will ready horribly and the bears will be in control of the narrative and lots of people have gains in AMD and will be anxious to take them.
Buyers will come in tomorrow mid morning but they most likely will be overwhelmed by sellers who believe that the world is coming to an end. It's that wave of selling that represents the best moment to BEGIN your buying.
You can't go in big because it will be Friday afternoon in the summer which means very thin trading.
But you have to get some in because this is your opportunity to buy AMD at a discount to where it was when it reported amazing numbers.
Do no more buying until Monday because, again, the papers and the commentary will all be negative and everyone who has hated the market will be screaming for you to get out.
On Monday morning AMD should actually begin to stabilize, perhaps at a level similar to where it was when you bought your first tranche.
Ideally you would like to buy your next slug below the last buy. If you can't, then repeat your buying at that level. Don't pay up. If it comes down, buy more.
After day three, AMD should be fine and the panic should subside.
If it doesn't you should have left yourself room to buy the last bit of stock you might want.
That's how you use a selloff to buy a favorite.
Or, if you can't be that close to it, do this, put in a limit order to buy 100 AMD at $13.75 tomorrow. If you get hit -- meaning if you get a report that you bought stock -- then put your next order in at $13.25. Do not break that limit.
If you don't get it, then wait until Monday and buy the rest that you want.
I give you this level of granularity because I do not want you to be part of the panic mob. I want you to use this sale to buy stuff you didn't chase.
But the most important lesson here, the one you must understand is that when we have a reversal day like today the end-of-the-worlders grab the mike and won't let go until the third day of the selloff. I just don't want you to have to pay up when it's over.