falling knife

How to Catch a Falling Knife

It is a month from the election and we’ve already received our October surprise, in the form of President Trump’s covid diagnosis. Investors were already bracing for a volatile period after the election in anticipation of disputed results. As the pilot might warn heading into stormy clouds, prepare for turbulence ahead, involving the occasional sudden drops in altitude.

Where once you were in FOMO mode, picking up $SNOW for the opening price of $245 a share, you’re now realizing as it descends below to $220, it was priced for perfection. The drop continues and you still really believe in the stock’s narrative — when do you “accumulate” shares and lower your average share price? Stocks like $AAPL, $NVDA have had big runs but are certainly blue chip names.

You look at previous floors, it’s busting through them now. This is the so-called “falling knife”. Conventional wisdom says don’t — instead just get out of the way, wait until the market overall bounces back and ride the upward trajectory as the news and sentiment improves.

In the case of the upcoming election, this may be the most prudent path. In fact, before it gets too hairy, it makes sense to “ring the register” and move to cash until after the election is settled. It could be the first week of November or it could be a month after that. A disputed result could worsen portfolios the longer it lasts.

It’s important to understand the bigger environment you’re investing in – this summer was full of occasional turbulence that quickly recovered and certainly plenty of big name investors have expressed regret for being on the sidelines. On those days, when an isolated negative story such as a leading stock’s poor earnings, spooks the market, savvy traders do have a great opportunity to pick up their favorite stocks “on sale”.

For those moments, first you should’ve been “stalking the stock” to understand it’s patterns and general resilience. How “springy” is it? Does it often bounce back quickly? If so, one technique we’ve had success with:

How to Buy a Falling Stock

Wait until at least 11A (especially on a Monday when there’s pent up fear from a weekend of bad news) to let the sellers finish off. Then pick up a portion of stock on a trailing order, while it’s still declining. Pick it up at a 2-4% increase depending on how risk-averse you are. That way, when it turns around, you’re automatically a part of the ride back up.

If it doesn’t ever turn around, you just saved yourself the grief of watching it fall even further. This is best when your stock was an indirect casualty of the bad news, not directly the subject of the negative headline.