What to do When the Market has a TERRIBLE Selloff

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When asked what the market would do, revered financier J.P. Morgan gave a famous -- and invariably correct -- answer:

"It will fluctuate."

Indeed.

Tuesday's market selloff -- the worst day for the Standard & Poor's 500 Index since 2012 began -- should serve as a reminder to investors of Morgan's market truth. As equities rise on a broad uptrend, as they have in 2012, it's easy to forget that they can also fall. Our optimistic exuberance for new gains evidently outguns our ability to remember sharp losses and long, slow or no-growth periods such as we've seen in the past few years.

Like most individual investors, I'm positioned to benefit from rising markets, so I don't like to see a broad selloff. On the other hand, I'm a long-term investor who makes conviction buys on companies with bright futures , so day-to-day movements, while worth watching, aren't usually worth worrying about. I tell readers of my Game-Changing Stocks newsletter this in practically every issue.

Instead of worrying, I concentrate on thinking things through.

Here is Obermueller's Law: The market is always trying to tell you something.

A lot of otherwise intelligent investors react to fluctuations emotionally -- either positively with gains or negatively with losses -- rather than objectively seeking to figure out just what the hell is actually going on.

On a day like yesterday, then, most investors will sigh or groan and complain that 481 out of the S&P 500's components ended the day in the red.
That's one way to look at things.

Another perspective worth checking out is to notice something else: 19 stocks posted gains. Listing all the stocks that fell on a down day will generate data. But a list of the stocks that rose is a step toward garnering useful market intelligence.

Take a look at yesterday's winners:


The first thing to notice is the strong retail presence. Of the 19 companies on this list, six -- Supervalu, Staples, Family Dollar, Big Lots, Kohl's and AutoZone -- are brick-and-mortar retailers. (Include Amazon.com (Nasdaq: AMZN) , and retailers are nearly 40% of the list.)

Excepting Amazon.com, they were retailers with a theme: These are all stores people go to when they want to save money.

T iffany & Co. ( TIF ) , Nordstrom ( JWN ) and Saks ( SKS ) all had down days.

These "defensive" retailers -- places people will continue to shop even in or perhaps to a greater degree in a down economy -- were one of the sectors investors turned to when the boards turned negative.

This is sometimes referred to as a flight to quality . The idea is that investors, worried about -- whatever -- will seek a safer alternative to shield their assets.

The significant trend here, though, is not retail.

It's technology.

Specifically, it's semiconductors. When the going got tough, the tough looked to microchips. They bought Intel, Altera, Xilinix, KLA-Tencore, Microchip Technology, Analog Devices and Linear Technologies . Expand the tech circle a little wider to include the Motorolas and Amazon.com, and it's clear what the market is trying to tell us.

Tech is key.

Tech is not just shelter in the storm, either. It's got the most potential going forward.

Don't believe me? There's not a single issue of Game-Changing Stocks that doesn't touch on some form of tech innovation that in one way or another will change our daily lives -- and potentially generate serious returns for investors.

Look no further than the indexes: The Nasdaq Composite Index is trading at 23.6 times earnings . The five-year average valuation for the tech-laden index is 28.6. The index overall can rise more than 20% just to reach its historical valuation. But my guess is it won't stop there. My guess is the Nasdaq will breeze past its historic earnings multiple and reach close to a record.

Why? Look around you. We're in the midst of a mobility revolution. Apple (Nasdaq: AAPL) is the largest corporation in the country. New devices using new types of connectivity are gaining a toehold in mainstream consciousness. Go anywhere and look around at the technology people are integrating into their lives. And then think of what's going to happen when everyone in this country, everyone in the entire Western world and even the developing world is totally connected.

Remember, the best way to predict what's going to happen is to look at what's happening. Times they are a'changing -- true.

Truer: You ain't seen nothing yet.

Action to Take --> Growth-oriented investors should consider securities like the PowerShares QQQ Trust (Nasdaq: QQQ) exchange-traded fund, which tracks the leading 100 Nasdaq-listed companies. Also, be sure to check out my next issue of Game-Changing Stocks , which will review the latest companies to add themselves to the Nasdaq, and which ones are likely to deliver the richest gains going forward. Go here to learn more .


--Andy Obermueller

Andy Obermueller does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of INTC in one or more if its "real money" portfolios.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Investing Ideas

Referenced Stocks: AAPL , AMZN , JWN , SKS , TIF

Andy Obermueller

Andy Obermueller

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