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Keep Calm: Perspective, Not Panic, as China Triggers Volatility

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August 25, 2015
Practice your calm amid stock market volatility

The Dow Jones Industrial Average nosedived more than 1,000 points at Monday's open, triggering the start of another gut-wrenching day for investors. Fresh signals of a slowdown last week in China, the world's second economy, triggered a roller coaster ride for global equity investors as the Dow officially entered "pullback" territory, registering declines of 10% or more from its recent peak.

Stock investors may be wondering about their next course of action, and the first message for investors is: Don't panic. "It's money. Of course you are emotional," says JJ Kinahan, chief strategist at TD Ameritrade. "The market tends to flush out every so often, and this appears to be one of those situations," he continues.

Refocus those emotions into a plan. Investors can take this opportunity to examine their long-term investment goals, time horizons, and investing plans to help them keep on track.

"A word that comes to mind is perspective," says Patrick J. O'Hare, chief market strategist at Briefing.com. "The S&P 500 has not had a 10% pullback in four years. It's overdue," he said. Part of what has spooked investors is the pace or speed at which the declines have unfolded. "People get unnerved and think it is going to snowball," O'Hare adds.

A Growing U.S. Economy

Although the stock market may have registered a significant decline over the past several days, the underlying economy remains solid. "The U.S. economy is growing in a modest way, but is still growing. There is reason for more optimism for the U.S. economy than the Chinese economy right now," says O'Hare.

Rising levels of employment in the U.S., increased levels of homebuying activity, and a big bump in auto sales this year are positive factors for the domestic economy, O'Hare says. Low levels of inflation are also encouraging, and the renewed drop in crude oil prices keeps gasoline pump prices low for consumers.

Down Phase or Discount?

There can be some positives to a stock market decline. A down phase can offer long-term investors a potential buying opportunity. As Warren Buffett famously quipped: “Be greedy when others are fearful.” Investors can think like shoppers with a fistful of coupons at their favorite store.

Make your shopping list. This can be an opportunity to start building long-term positions in quality companies at a lower cost basis than six months or a year ago, explains O'Hare. "Retail investors can warm up to the perspective of Warren Buffett. He loves to see stock prices decline because it means he can buy shares of companies at lower prices," says O'Hare.

"Right now a lot of good companies are being caught up in the flush. If you still like a company, this could be an opportunity to buy," adds Kinahan. TD Ameritrade clients can pull up a chart of the S&P 500 and individual stocks (see figure 1). "If you are looking to buy, look for an area of support on the chart," says Kinahan.

Volatility equals trading opportunity. For shorter-term, nimble traders, the increased levels of volatility can also offer trading opportunities. But don't look to hit home runs. Market conditions may warrant smaller positions. Trade smaller and don't risk big losses. Don't let things run against you, says Kinahan.

If you’re in a position where you have more risk than you are comfortable with and you want to unload some of your positions, "the key is some," says Kinahan. "The mistake many investors make is 'all in' or 'all out' when it comes to investing. It is a game of partials—not all chips on the table. Don't put yourself in a situation where the volatility is getting the best of you," concludes Kinahan. 

Daily chart of SPX from thinkorswim

FIGURE 1: SEEKING SUPPORT.

Pull up a chart of the S&P 500 or your favorite individual stocks to gauge if a stock you've been interested might qualify as a bargain. Spot technical support levels to help inform your decision. To view this daily chart of the S&P 500, TD Ameritrade clients can log in, then go to the Trade tab > Chart > and type “SPX” in the ticker box in the upper left-hand corner. Chart source: TD Ameritrade’s thinkorswim® platform. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.