1. Blue chip stocks are more liquid - They take time to fall. That's why the 'safe investor' prefers them. They will lose 10% in a day, but they will do so with a lot of volume, and more than likely with considerable range trading, or intra-day variability. Now, I am expecting a 20% fall in the S&P500 (US) and 12% in the ASX-200 (Australia), so this is largely the response I'd be looking for in the blue chip stocks which account for the bulk of the market. Of course, some will perform better than others.
2. Spec stocks are illiquid - They will fall off very quickly because they are in a sense considered 'unsustainable' stocks, insofar as they have small 'vulnerable' projects, no assurance of cashflow to finance projects, and less ready access to finance when they need it. i.e. You are vulnerable to equity raisings at low share prices. This is however a generalisation that we can opportunistically profit from. Just as importantly, we need to realise that spec stocks are not going to behave in the same manner as blue chips - because they are less liquid. We can expect a sudden collapse because there is a complete withdrawal of buyers. Some of these buyers were only manipulating the market in any respect so they could unload stock, so you can expect the withdrawal of false support as well as 'true believers' who misjudged the market. Then of course there are all the sellers front-running each other to unload stock because they fear a 'liquidity crush' at this end of the market. This of course prompts a more severe correction in the specs. It also means that there is considerable panic. We can as investors profit from others panic. We need of course to have some better appraisal of the market, or some semblance of awareness as to the specific merits of specific stocks, which might be expected to perform better than the rest, or defy the 'general market sentiment'. After that initial collapse, and we are looking for a '2-3 day period of fear-induced selling', there is destined to develop a 'spread' or 'buyer-seller' gap in the illiquid specs. That's after all part of the liquidity problem, the 'ambivalence' over price discovery. Is the market going to fall further. If there is a big gap between buyer and seller, you have likely reached the stock's bottom, and you will see an 'infilling' of that gap, and eventually a restoration of confidence, and a recovery in the stock. This pattern is also conveyed through analysis of candlesticks. If you have not invested just before the 'gap' develops, then you have missed the 'sweet optimal buy zone'. The question is whether you are able to get adequate 'liquidity' to get a good enough position/volume of stock. Be careful to 'fill up' the 'buy side' of the market, as you are actually creating confidence. Similarly if you take out all panicking sellers, you will give comfort to sellers. They can see you 'off screen' buying up small volumes.
The lesson is that, we might wait for the stock index to 'find bottom' before we buy in the blue chips, but in the spec end of the market, you are more likely to be looking at a point of 'exaggerated fear' in the market. Specs cannot keep up the same length of collapse as the blue chips simply because they are falling by greater percentages each day. This is a vulnerability in the specs; but as we all know, its a source of opportunity as well. Not all sell-offs are so rapid, but the nature of markets is changing with derivatives, so rapid corrections are becoming more commonplace. Of course before you can buy, you need to have your trading account set up, linked to your bank account, and your bank account funded. A broker these days will not buy without money in the account, and you can't buy unless you have cash (liquidity). So this is a 'sell opportunity' I believe. Refer back to my arguments for suggesting as much here.
In my Global Mining Investing eBook I introduce investors to the benefits of investing in spec mining stocks. Its a livelong education that encapsulates other skills. I'm using investing as a practical outlet for your intellectual development, in the same way as its had that practical manifestation in my life. This will include consideration of trading systems, psychology, philosophy, politics, finance, accounting, mining engineering, geology, geophysics and mineral processing and markets. Why do you have to learn technical geoscience? You don't, but there are several reasons to heed:
1. Its probably the best way to make money - both generally and specifically at this point in the economic cycle. Firstly from demand-based stocks as well as precious metals.
2. Its a practical outlet that will sustain your 'practical interest' as opposed to abstract topics that you might struggle to integrate and endue.
3. Its an integration with broader lifelong cognitive skills like critical thinking
4. Its rooted in economics, psychology, science and philosophy, so introduces analytical skills that most people fail to get from memorisation in the school system. This is after all why our empirically-driven political system is failing us....we only got half an education. The half that makes us compliant relativists.
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