Investment Lessons: The Signal After the Series Troubles

May 22, 2022, 1:01 pm EDT

The Signal After the Series Troubles

What is the signal when you drive your car but suddenly notice a series of troubles like noise, crumbling, or smoke conditions? It is likely that something unusual is going to happen. You are better slow down and stop to check it out before it is too late. 

The same principle can apply to the stock markets where all indexes were down continually down for the past 7 weeks which is very unusual in the stock market history. The normal condition is that the markets will rebound after a few weeks of weakness. But it does not happen this time in 2022. 

It reminded us of a historical event of Dow Jones’s down 23% drop in one day 10/19/1987 after a series of decline days as shown. 

Indeed, it is a rare event that only occurred once in the past 120 years of records. However, it describes the collapse of confidence of market participants that everyone decided to exit immediately when available support levels are broken continually in a short period of time. Especially, it occurred after the record top is made a few months earlier (08/25/1987). Overly optimistic investors were not prepared for the sudden weakness at the top. When they felt the trouble moments, it is too late to unload their shares expect a panic sell-off. 

Are similar actions going to happen in 2022? We do not want to make predictions or conclusions. But, it would be wise to always be prepared by looking back the history to see what happened before.

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