What to Do When the Market Tanks

It happens. An outlier event collapses the market. It could be something as innocuous as an economic report that, at other times, would hardly move the needle. But, for some reason, whether SPY tests at an all-time high or pushes up into a major resistance level, then a seemingly insignificant news item suddenly sends SPY southbound so fast that even a stop loss won’t get you out in time. You ponder what just took place, how the market can slide so fast, so deep. You’re stuck in calls. Mind you, there is still some time to expiration but… what to do?

First of all, never panic. The worst thing to do is sell, where you will undoubtedly lose the bulk of your capital. Just stay calm. You do have time, correct? After all, you did heed our warnings about always buying time.

Secondly, find out just what spooked the market. In all likelihood, it was a relatively short-term breakdown. If the S&P 500 is generally in a long-term, stable, upward-trending pattern, then a short-term pullback, even to a deeper support level, may not be indicative of a complete meltdown.

This is one occasion when patience most often pays, although you may have to wait several days to recover from this slip.

I find comfort looking back at the hourly charts. Dec. 18 saw SPY tank 20 points in one day. The next day, it rallied slightly but edged lower still. The following three days pushed this stock back to within 99% of the range before it dropped. Your option would not have fully recovered, but perhaps there may have been enough of a move to repair the trade or at least somewhat minimize your loss.

Dec. 27 saw another eight-point slide, only to fully recover five days later.

Heading into the new year, Jan. 2 saw SPY collapse 12 points. It not only recovered the next day but also stretched another seven points higher than before it dropped.

On Jan. 10, the market took an 11-point swipe at the price, only to surpass previous recent resistance levels to carve out new all-time highs and beyond.

Jan. 24, Jan. 31, Feb. 7 and Feb. 12 saw similar behavior, although not enough to recover fully on call options. That said, much of the premium would have reinvigorated the option, reducing any major loss. Then there was Feb. 20 and, most recently, on Feb. 24, when SPY dipped considerably lower before retracing somewhat.

One trick is to trade small, trade often. That way, you should never be heavily invested in any one position that could materially affect your overall balance. Hold on for the reversals, which usually occur within a few short days thereafter. By trading small, trading often, you trim back your exposure and gradually edge up your winners in a longer run. The market is simply too volatile with the Trump administration at the helm, disrupting any cohesiveness we may have enjoyed in the past. Simply put, too much is happening now for the market to gain any foothold on pricing. And for that reason, it’s best to limit exposure.

These are not ordinary times we are trading in, if there is such a thing. Markets are volatile, trying to make sense of Trump’s tariffs, immigration, foreign policy and other issues, as well as disappointing earnings from some major stocks and AI threats from China. Trying to keep up with all the news can be daunting at any time, let alone stacked on a daily basis.

These are just some of the things Jon and I discuss every morning. Want to find out more? We teach this every morning in our highly acclaimed Trading Room, mornings from 9:20 to 10:30 a.m., ET. Click here for details.

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Create great trades!

Hugh