Monday, September 15, 2008

Where's S&P 500 Support after Today's Big Drop? What should we do?

New Trading Range

Today, the stock market as represented by the Dow Jones Industrial Average dropped over 500 points for a loss of 4.41%. The S&P 500 dropped 59 points to 1192 for a 4.71% loss.

This drop was not unexpected. Around July of 2008, the S&P 500 hit a new low of 1200. Often, these lows are re-tested, and this is what we had today. We re-tested the lows and broke below previous support level.

We expect the S&P 500 to find a lower trading range.

Based on previous analysis, there's a good chance that the S&P 500 bottom could be between 1077, to 1172, a potential 10% drop from here.

Re-Evaluate Portfolio and Goals

So what should we do now? Over the long term, the stock market is the best place to be. However, this involves risk.

Have you looked at your goals and your portfolio and re-evaluated where you are? Do you need the money within the next five years? Do you have many decades to weather the storm? Do you have credit card debt? Do you have too much risk in your Discretionary Portfolio (as opposed to your retirement portfolio)?

Possible Ideas

So your main focus should be to re-evaluate your portfolio and your goals and your current financial situation. This should be the basis of many of your actions.

Depending on your high level game plan, here are a few tools:
  1. Readjust allocation: Maybe you might want to have more cash or bonds, and less exposure to equity.
  2. Stock or Sector Rotation: Maybe you might want to rotate away from sectors which are bad and rotate to the safer consumer staple names such as Procter and Gamble (PG).
  3. More Diversification: Maybe you are too concentrated in your portfolio? Maybe you should readjust your portfolio to have better diversification.
  4. Move towards ETFs, and Index Funds: Are you sure you can still keep up with your stock portfolio? Maybe you should consider just investing in broad based index funds, or ETFs. Or, you could do a combination of both for the Core and Explore method.

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