Panic vs. holding on: Guess which strategy is winning

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‘Never sell into a panic’ is a standard piece of advice on Wall Street.

Since August, it has been fine advice to ignore.

Today we had yet another panic in the market, amid the continuing erosion of confidence in virtually everything -- the U.S. economy, the global economy, the financial system, the political leadership, the market itself, etc.

The Standard & Poor’s 500 index slumped 34.27 points, or 4.7%, to 700.82, its lowest close since Oct. 1996. The index now is down 55.2% from its peak in October 2007.

Was it a mistake to sell today? Let’s review recent market history:

-- The first major panic of the financial-system meltdown was the selling wave that took the S&P 500 down 23% from Sept. 30 to Oct. 10. The close Oct. 10 was 899.22. If you would have sold at that level, you would have saved yourself from a further 22% loss through today.

-- Thesecond major panic, from Oct. 20 to Oct. 27, took the S&P index down 13.8%, to 848.92. Selling at that point would have saved you from an additional 17.4% drop.

-- The third major panic saw the S&P lose 25.2% from Nov. 4 to Nov. 20, when it ended at 752.44. Bad time to sell? Those who held tight are down 6.9% since.

CNBC’s Jim Cramer was bashed by some Wall Street pros for telling listeners on Oct. 6 to sell any stock holdings that they couldn’t afford to hold for at least five years.

The S&P 500 closed at 1,056.89 on Oct. 6. Investors who took Cramer’s advice that day have been saved from a further 34% loss of capital.

On Oct. 17, billionaire investor Warren E. Buffett wrote an op-ed piece for the New York Times encouraging people to buy high-quality stocks. He cited his cardinal rule of investing, which was to ‘be greedy when others are fearful.’ Since then, the S&P index is down 25.5%. . . .

Isn’t the market dirt-cheap by now? The problem is, it’s pointless to talk about fundamentals, such as corporate earnings. As S&P chief investment strategist Sam Stovall concedes, ‘Earnings don’t matter,’ because no one will believe any earnings estimates as long as the economy continues to slide.

In the absence of fundamentals, Stovall says, ‘All we can really go on is the technicals’ -- chart-watching -- to try to guess where the market might bottom.

He believes the market decline should stop somewhere between 625 and 675 on the S&P 500. If the index goes to 625, that would be an additional 10.8% drop from here.

Bill Strazzullo, a partner at Bell Curve Trading in Freehold, N.J., says investors may have to ponder ‘the unthinkable’ -- the S&P back to around 500, which was near the jumping-off point for the spectacular market surge that began in 1995 and continued through 1999.

‘You have to ask yourself, what is the real risk here?’ Strazzullo says. ‘The thing we are least concerned about is the market running away on the upside.’ In other words, even if the decline stops, he says, he can’t identify a single catalyst that could spark a wild new bull market any time soon.

‘On the other hand,’ Strazzullo says, ‘I am worried about another 25% to 30% move down,’ if panic feeds on itself as it did last fall.

Cramer had it right in October, even if all he did was tell people something they already should have known: The stock market is no place for money you will need in the next five years.

That’s as true with the S&P at 700 as it was at 1,056.

-- Tom Petruno