10 Steps To Be Ready For The Next Market Pullback

A TTS members-only exclusive exploring how to approach account management in the potential event of a pullback.

10 Steps To Be Ready For The Next Market Pullback

If you turned on TV or went on the internet and the report was that Bank of America stock had pulled back by $1.59 from the recent high, whether it was in a day or a few weeks, what would your reaction be? Probably like most of us, no big deal and it may not even register. What if the report was that the Dow Jones Industrial Average, the Dow, had corrected by 1,300 points from the recent high, whether today or over a few days or weeks, how would you react to that? Quite a few would be taken back by that 1,300 point move, and the online and TV media would no doubt be running stories about "the big pullback" and "Markets in Crisis" 24/7. (I monitor the S & P 500 and not the Dow, but mainstream America and the general media seems to pay closer attention to the Dow.)


The fact is, they are the exact same pullback - in percentage terms.  Bank of America closed yesterday, January 23 at $31.92, so a 5% "pullback" equals $1.59 and a 10% pullback is $3.19. The chart above of the Dow shows lines drawn at 5% and 10% pullbacks respectively. 

The Dow closed yesterday at 26,210, so a 5% pullback is 1,310 points, and a 10% pullback is 2,620 points, which even to me "sound" like big numbers. The numbers, in percentage term however are the same, 5% - 10%. Obviously time frames do matter. A 5% - 10% pullback in one day may have much more significance, both from a technical and psychological perspective,  than a 5-10% pullback over a few weeks or months.

The fact still remains however that a 1,300 point pullback in the Dow would cause many to pay attention, even though in percentage terms it does not seem so severe. It reality, that price level takes us back to January 2, 2018 price levels (three weeks ago) and not even down to the 50 day moving average, ( a widely held intermediate-term trend measure).

So how do you think you would react? Fear, panic, no reaction, go online and look for more information to help form a conclusion? The fact of the matter is that as investors and traders we always have to be prepared for the fact that a 5 - 10% pullback, or more, can always be just around the corner, whether it is a one day event or a 6 month event. They will not ring a bell for us and say, "now is the time to get your risk in order". So with markets at persistent all time highs, and with many, including myself very long, (but according to my plan and not over-exposed for my standards)  how should we approach account management?

To put things into context, I have been trading since 1997 and have seen the Nasdaq triple and then lose 80% of its value between 1998 and 2002. I have seen household names like Cisco and Intel go up 5% a day for what seemed like a year and trade at triple digit PEs, and then watch them trade down 80%+. I've watched Wall Street and media favorites like Enron trade from $80 to eventually zero , and "safe,  widows and orphans" stocks like Lucent trade from $72ish to zero. I have seen Wall Street legend  Bear Stearns company open at $2 after trading in the $60s weeks before, seen Lehman Brothers go bust and talked to friends at Merrill Lynch as their life savings traded down 95% to the low $2 range.  So I have seen some volatility and surprises in my time.

This blog is by no means any type of a market call or prediction. Those who have followed me online for any period of time know that I do not make market calls or predictions and I simple trade the price on the screen in front of me. There is however right now a considerable amount of dialogue being devoted to how long it has been since we have had a "5% pullback". Very intelligent and experienced traders and money managers have weighed on on every side of the equation. Some say to buy everything now, some say to sell everything now, some are on the fence. The media shows chart after to chart discussing it. 

I wrote this blog for the members of my website to share with my them my thoughts, analysis and experience of having traded through similar situations before over the past two decades amd to answer some questions that they may have.  I take a calcaluted, systematic approach to portoflio and position management. I don't just manage one position at a time, I tie it all together in a much more comprehensive, strategic approach.

Following are some of my thoughts:

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