The Dow Plummets: Here's Where to Find Opportunity
Apr 10th 2012 3:18PM
Updated Apr 10th 2012 4:32PM
A day after the Dow Jones (INDEX: ^DJI) dropped 1%, the market opened largely flat. It looked like another day of pause in a year that's been generally light on fear and filled with days of small gains that added up to the Dow's best quarterly performance since 1998.
However, as the day progressed, markets began a seemingly unending downward spiral that continued a weeklong swoon.
With the day nearly over, the Dow is down nearly 200 points, good enough for a 1.5% drop, which is significantly outpacing losses yesterday when jobs data drove down the Dow. Perhaps even more troublesome is the continued soaring of the VIX, or fear gauge, which is set to rise for its eighth straight day. As I've previously noted, one of the great underfollowed story lines this year has been the disappearance of "wild markets" that defined the past several years. The VIX had dropped all the way down to 13.66 after peaking at 48 last year (higher VIX scores show higher "implied volatility" in the market's future).
With the markets churning downward this past week and the VIX soaring, is it time for investors to panic? My view is to take a "wait and see" approach. As I noted in an article at the end of March, the strength of the market's first-quarter rally was concerning, namely for the Nasdaq (INDEX: ^IXIC) , where large tech stocks rallied across the board even though performance was ho-hum when backing Apple (NAS: AAPL) out of the index. When you're experiencing record results -- the Nasdaq had its best first quarter since 1991 -- it's expected that there will be some speed bumps along the way. Your challenge as an investor is to not be myopic when the market gets scary and keep up the search for some great bargains that are presented.
I recently called out a grouping of stocks I'd want to buy if the tech market crashed. I then bought one of those stocks -- Riverbed (NAS: RVBD) -- in a portfolio I manage on Fool.com last week. However, at the time I noted, "I remain cautious on the strength of the tech rally and would prefer keeping Riverbed as a watchlist stock in case growth stocks see big losses in any pullback." Well, with a pullback that's sent Riverbed down 8% in the past week, it looks like I've gotten exactly what I was looking for.
The key is to find great businesses that you believe in across the long term that are getting thrown out with the broader market. While any slowdown of the global economy would certainly hurt a broad swath of companies, we've still only witnessed a couple of marginally bad data points across the past couple of days. There's no real reason to go Chicken Little. More to the point, even if the downturn continues, great companies bounce back. You only need to look at the depths Apple plunged to back in early 2009 to know that superior companies with great balance sheets can actually extend their lead in times of market turmoil.
So while you might wince every time you check on the market today, the larger point is to keep a watchlist of your favorite companies close at times like these. The line between desperation and opportunity is very thin.
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