What's Coming After the Plunge?

It's been a crazy week for the stock market. With five straight days of declines culminating in yesterday's 214-point drop for the Dow, many investors don't know whether to expect a bounce after a perfectly reasonable correction or much larger declines to come.

But there's a smarter move than trying to hold yourself to the impossible standard of guessing exactly what's going to happen when. I'll get into that better choice later in this article, but first, let's take a look at how we got where we are and what's looming on the horizon.

Now that stocks have proven once and for all that they don't always go up, it's useful to take a look at everything that's going on in the markets right now. Here's a sample:

  • Stocks have plunged for a solid week now, but they've still given back only a small portion of the gains they've earned since last fall. The drop so far doesn't even qualify for an official 5% correction.
  • International stocks have seen much worse declines. In particular, as the focus turns back to European sovereign debt worries generally and the Spanish economy in particular, Telefonica (NYS: TEF) and Banco Santander (NYS: STD) have seen hefty declines in the past week. Until rates on Spanish government bonds begin to settle back down, investors will be scared that what started in Greece will inevitably spread across the weaker economies of the eurozone until the fabric of the European Union is put at risk.
  • On the commodities front, oil prices have also fallen, and with natural gas still in the cellar, Chesapeake Energy (NYS: CHK) and SandRidge Energy (NYS: SD) are just two of the energy companies that have seen 10% or more declines in the past week. Meanwhile, gold prices have held up fairly well, but mining stocks are falling hard, as even industry leader Barrick Gold has posted a price drop. Meanwhile, industrial metals like silver haven't done as well, and Silver Wheaton (NYS: SLW) has done even worse as fears of spreading emerging-market weakness remove a key underpinning of the metals markets.

Even though these markets don't always move in unison, they share a common theme: Trends that have worked in the past are now no longer working, and investors who counted on being able to follow profitable strategies to exploit those trends are having to look for alternatives.

Beginning investors often think that in order to succeed at investing, they have to identify key reversals in long-term trends at the first opportunity. Otherwise, they get trapped by thinking that if only they had picked the market's top, they could have gotten out before they lost substantial amounts of their capital.

But trying to time trend changes exactly is nothing but a true fool's errand. For one thing, changing trends usually start out looking like short-term countertrends from the previous move. Also, it usually takes several apparent reversals before a trend truly ends and another takes its place. If you pay too much attention to every little move in the market, you'll end up getting whipsawed mercilessly, piling up trading costs and losses to boot.

So what's the smarter move? For many, it's doing absolutely nothing.

As hard as it is to sit still when the market is plunging, it can actually be your best move in many cases. It was that discipline that kept so many investors from selling into the panic of late 2008 and early 2009 -- and then kept them in the market throughout the entire recovery that followed. It was that willingness to do nothing that rewarded investors in many beaten-down individual companies, as countless stocks came back from the brink of oblivion to recover much or even all of their losses.

No one can tell for certain whether the last week's declines will continue or whether the onset of earnings season will provide a reprieve or even a reversal of the market's recent swoon. But by remaining confident that in the years after this plunge, stocks will continue to represent good value for long-term investors, you'll put yourself in the best position possible to take maximum advantage.

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At the time this article was published Fool contributor Dan Caplinger likes a good plunge as long as it's into some warm water. He doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy knows what's coming.

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