November 5, 2014
Why I'm Looking Forward To
The Next Selloff
By Dave Forest
Something unusual is happening as I write this.
The stock market has once again been making new highs.
At least, it feels like an unusual occurrence after last month's steady selloff.
This quick "correction" followed by an equally swift rebound, has a lot of observers feeling jittery. Many of my Top 10 Stocks subscribers have written in to ask advice on our portfolio holdings during this period.
With that in mind, let me just say one thing...
I do not think it's time to start running for the exits.
I believe there a few reasons for the early October selloff-- none of which have to do with decaying corporate fundamentals, or an impending stock market collapse, as some analysts would have you believe.
But before I get into my take on the recent decline, let's look at what actually happened -- and how far stocks really fell.
In overall terms, last month's dip has, in fact, been minor. While it felt like stocks took a big hit in many cases, the overall Dow was down "only" about 700 points -- or less than 4%.
It's also important to keep in mind that this relatively small decline came from a high level in the market. As the chart below shows, when viewed on a timeline covering the last five years, the recent dip looks like a blip.
In fact, the market decline was much less severe than the one we saw in January -- when the Dow lost 6% in a matter of two weeks. It's worth remembering that those losses were completely recovered over the next month of trading -- after which stocks proceeded higher. And this time around, that's also proven to be true, as the Dow marched right back up and made new highs.
So in short, I don't believe there's any reason to panic -- far from it.
Instead, I believe that the unsteady trading over the past month may have been caused by a phenomenon that's completely unremarkable and ordinary -- an event that happens, often like clockwork, around this time of the year.
It's what some like to call "housecleaning."
September 30 was the end of the fiscal quarter for most companies as well as for many of the investment funds that buy and sell billions of dollars in stock in the United States and around the world.
And for all of these players, the end of the quarter can be a nerve-wracking time.
The major reason is reporting. For public companies, of course, the end of quarter is the time when they must start preparing their quarterly financial statements. Their accountants are getting ready to show investors the intimate details on their revenues, costs, and assets -- figures that can cause a stock to soar or stall.
But investors often forget that the same kind of reporting also takes place for investment funds at quarter-end. Many big institutional investment groups are required to release details for the past quarter on their stock holdings -- and the performance of these shares.
And that can cause some unusual trading patterns.
Imagine you're a fund manager and you've purchased millions of dollars in Company XYZ. But the stock has tanked -- down 25% during the quarter.
As you come closer to quarter-end -- and reporting time -- you have a decision to make. Do you keep the fallen stock on the books, and have to report a big loss to your investors when you release your regular statement?
Or, do you sell before September 30 -- thus avoiding having to report this holding and its performance?
Many fund managers choose the latter option. In many cases, they almost have to. Showing a big loss on the quarterly statements could spook investors -- causing them to pull cash out of the fund, reducing the overall pool of capital and the associated fees.
Often, it's better for managers to sell and thus mask their underperforming holdings. That can lead to a big rush for the exits at quarter-end -- when managers take a final tally of which holdings have been beaten up, and which should be jettisoned for cosmetic purposes.
Here's the kicker: the kind of selling activity I just outlined has absolutely nothing to do with fundamentals.
It's simply jittery managers trying to please equally jittery shareholders. The only real result of such selling is that it makes good stocks more affordable for those investors with the conviction to buy during down periods like we saw last month.
I thus believe that any major selloff like the one we just saw is no reason to worry. In fact, it provides a great opportunity to buy shares of high-quality firms at excellent valuations.
It's one of the key reasons why we focus on what we call "Forever Stocks" in my newsletter, Top 10 Stocks. These are the kinds of solid companies with irreplaceable assets, wide moats and shareholder-friendly policies that reward investors for years -- even decades. So even with a downturn in the overall market, many of the stocks I've recommended to my subscribers are still a buy, but at an even better price. If you invest this way, you never have to worry about market downturns or global crises.
Special Editor's Note: We're excited to announce that Dave's groundbreaking new research report, "The 10 Stocks To Own For The Rest Of Your Life," will be coming out later this week. This never-before-seen list of 10 "Forever" stocks have gained an average of 829% over the past decade, beating the S&P 500 by more than 7-to-1. Dave recently shared his new research and a few of these stocks with a live audience at St. Edward's University, and now we want to share them with you. To be the first to get access to the filmed version of this special presentation as soon as it's released, go here now.
Good investing,
Dave Forest,
Chief Investment Strategist
Top 10 Stocks
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