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Why did the market drop and what should you buy NOW?

On Thursday, 3 September, the S&P500 index dropped by 3.51%. This market “correction” continued until Friday, 11 September, resulting in a total drop of 6.70%. Many investors are puzzled with this drop. What made the market drop? Why did the market drop? Should we buy into the market now? Will the market drop even more in the future? What should we buy now? These are some questions in the heads of many investors. This article will seek to answer these questions and I give my personal take on this.

What made the market drop? 

This drop was mainly led by the fall in tech giants such as FAANG. Take note that Tesla, although dropped 20%, is not included in the S&P500, therefore did not affect the S&P500 index. In fact, one plausible reason behind the fall in Tesla shares can be due to its exclusion from the benchmark. Tesla was expected to be added into the index, but to its disappointment, it was not one of the 3 added to the index.

However, that is not the point. We know that the market drop was led by tech giants, but the rest of the market also suffered a minor correction, such as big banks (JPM), oil firms (XON) and more. But why? What happened? Was there any bad news? 

Why did the market drop? 

The puzzling part is that there was 0 bad news. On Thursday, everything was normal. The markets were “supposed” to behave normally. But experienced investors should know that markets do not behave like they are supposed to.

In fact, the only piece of “relevant” news was the monthly US Jobs Report. In fact, the news was positive. Payrolls increased and unemployment fell from 10.2% to 8.4%. This even surpassed expectations. So, why did the market drop?

My informed guess? Momentum investing

Momentum investing involves a strategy to capitalize on the continuance of an existing market trend.

Investopedia

This form of investing involves investors buying into shares that have prices surging up while selling into shares with prices dropping. Over the past few months, the FAANG companies have received lots of love from the retail investing community. Their prices have surged up. This probably led to a lot of hysteria and euphoria about these companies resulting in investors buying into more shares.

However, with the recent tech selloff, investors became more grounded. They realised that the NASDAQ surge could have been orchestrated by Softbank.

Basically, Softbank, a Japanese multinational conglomerate, was revealed recently to be the ones betting heavily on US tech stocks through options. Through the recent run-up, they have scored a huge $4 billion gain.

With the recent selloff, investors became more fearful of the recent tech run. Beginning to doubt themselves, they also joined in the selloff, resulting in a correction.

However, this is just my take on the opinion. No one really knows why the market dropped. Consider this a good time to DCA into the market.

Should we buy into the market now? 

SPY Technical Chart
Technical Chart of SPY

Let us look at the technical chart of SPY (S&P500 ETF). The green line represents the trading channel. As seen the price correction that occurred is still within the resistance line of the trading channel. There is still some room for it to drop further. However, that is quite unlikely in my opinion. The price has already reached the yellow support line. If it were to break through the resistance level, it would be likely to reach the red support line.

Although I am not a complete advocate of technical analysis, this chart can give us some idea of how the price will move in the near future.

Therefore, I do not think the market will drop much more in the coming weeks. If you want to buy in, I think it is a decent time to buy-in. Then again, timing the market is difficult. Do not try to time the market. Just buy-in and hold. When the market falls, consider buying in more to average down your costs.

Will the market drop even more in the future? 

The market may drop more in the future. Who knows?

Warren Buffett has said before that “be fearful when others are greedy and be greedy when others are fearful”. The CNN Fear & Greed Index has been leaning towards the green side ever since the market recovery from 23 March. It seems like the market is rather optimistic about the recovery.

Once again, this shows that we cannot time the market. Buy into a low-cost diversified UCITS ETF and call it a day. Continue buying in and holding. Be a net buyer of the market.

What should we buy now?

Personally? I think you cannot go wrong with CSPX. It is a UCITS ETF which tracks the S&P500 and has an expense ratio of 0.07%. I recommend you buy it through Interactive Brokers because of its low commissions.

IWDA (tracking developed economies) and EIMI (tracking developing economies) may be good choices as well. However, they have higher slightly expense ratios. All these ETFs I suggested are listed under the London Stock Exchange. This is because as Singaporean investors, buying Ireland-domiciled ETFs (aka these ETFs), we incur lower costs due to lower withholding taxes of 15% instead of 30%. I am currently working on an in-depth analysis comparing the various popular ETFs. Do watch out for that.

As for individual stock picks, I recommend you that you have a sizeable portfolio before dipping your toes into chasing alpha (getting returns superior to the market). If you are not convinced, read The Little Book of Common Sense Investing (shorter read) or A Random Walk Down Wall Street (I wrote a short article on it here).

Some stocks I am looking at include VMWare (VMW) as well as Intel (INTC). Look out for future articles for my opinions.

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2 Comments

  • Gaius

    I’ve had IWDA for a while but CSPX seems like it would provide better returns just by virtue of its lower expense ratio. I think I’ll consider picking some units up! Thanks for the recommendation

    • Junior

      Hi Gaius,

      It’s nice to hear that you are considering CSPX too. Just take note that CSPX has a higher price per unit, and considering that you cannot buy fractional shares in IBKR for LSE, you need to have it in multiples of $300~.

      Also, IWDA has a pretty large exposure of the US market already. You may want to consider diversifying to non-US assets. 🙂

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