Tuesday's Drop Was Temporary Insanity (And the Keyword Is Temporary)

At 8:00 a.m. on Tuesday, I was sitting at my trading desk feeling good. My accounts had performed wonderfully in July and the first half of August. The second half of that month stole back most of my August gains, but September was nicely profitable at that point. Futures on the Dow Jones were holding over 200-points to the good. All was well with the world. The consumer price index numbers were due at 8:30 a.m. Most media experts were thinking we'd tap on the brakes in the inflation rate and get a further upturn in stocks. Didn't President Biden crow about zero inflation last month, because he was sure things were getting better? Oops. That wasn't what played out. Core inflation (which excludes food and energy) rose sharply from a month earlier, more than offsetting the benefits of weaker energy prices. Official CPI numbers, which always seem to understate my own experiences, were 8.3% higher year-over-year. In the time it took to take a sip of coffee, Dow futures plunged from up 223 to down over 500. Are interest rates the only thing that matters in stock evaluation these days? Apparently so, based on that reaction. Markets opened weak and held those negative sentiments somewhat steadily through about 1:30 p.m. If you were waiting for an afternoon bounce, you were more than disappointed. Things only got worse from there. A last hour selloff accelerated into the close, lopping about 4% off the Dow and S&P 500 and more than 5% from the Nasdaq. Virtually all my favorite stocks were down big, yet there was no company-specific news on any of them. One, Children's Place , dropped a stunning 13.37%, on Tuesday, hitting a new 52-week low in the process. Shares that fetched $113.50 last November were available at $34.91 intraday. PLCE posted $13.40 in adjusted earnings per share in fiscal 2021 (ended Jan. 29, 2022) and is still on track for about $7 in EPS this year without the aid of economic stimulus, or child tax credit payments. At $35 or so it sells for around 5-times earnings vs. a more typical 16 - 17 multiple. Five times earnings translates into a 20% after-tax return on the company's current market cap. I will write this week about Berry Global , another fine company selling for a fraction of almost anyone's assessment of its true worth. What can you do when the market ignores facts and trades strictly on emotion? The best thing is to keep plugging along on what you know makes sense. Temporary insanity is, by definition, temporary. Craziness cannot persist over the long term. It rarely lasts longer than a weeks or months. I've been supporting myself almost exclusively from my portfolio earnings for over 22 years now. If my stock and option selection techniques did not function well that would not have been possible. Even the best investors must suffer through periods when their selections seem out of step with current viewpoints. That is why I spend so much time determining what the stocks I recommend are really worth. I'd never expect readers to buy a stock simply because, I said it looks good. That same criteria is not true for most of the TV commentators and financial columnists you hear from each day, which live by the advice ... Never give a price target and a time horizon in the same time. Most of them don't even bother to attempt to value the shares they are touting or panning. They merely say things like Buy tech, Truckers look dicey or Semiconductors are the place to be right now. If stocks you like get cheaper than you ever thought possible ... consider buying more to average down. If you don't have cash available, but do have excess free buying power, consider shorting long-dated naked puts to lock in prices which are unlikely to persist. If nothing else, consider simply sitting tight and waiting for the rebounds which are likely to take place. Bad markets also offer chances to upgrade portfolios by selling out of things that looked good at the time but you no longer have full confidence in. It may save you taxes next April and it will certainly provide you with capital to take advantage of unexpected bargains which have shown up. Roth IRA conversions make sense, too, if you hold good shares in traditional IRAs which can be moved into tax-free Roth accounts. Years like 2022 (so far) are painful to live through, but can end up helping you achieve long-term financial goals. Don't give up the ship.

Tuesday's Drop Was Temporary Insanity (And the Keyword Is Temporary)

Amid this market mania, let me show you why when stocks you like get cheaper than you ever thought possible ... consider buying more to average down.

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