Equity markets tanked on Monday of this week.  The typical labels describing the day have been coined; not necessarily the most imaginary but probably the most common is “Black Monday”.

I saw a great tweet on the topic from someone living in a third world country aimed at the first world nations  ” I feel really bad for you, having to sell one of your 4 TV’s”.

One of my favorite questions is about why people panic sell.  I actually doubt that the majority of the trades were anything but well planned profit taking.  Remember on any given day institutional and day trading initiate most of the trades (buy or sell) and well it’s possible fund managers/day traders are acting emotionally it is far more likely they are selling to realize profit with a plan to reinvest when the market settles, that is market timing approach versus value investing.  I am sure some panic selling occurs but my guess would be a very small percentage.

How would it work?

Say you bought 1500 shares of Bank of Montreal (BMO) at cost basis of $35 share.  On Aug 19th BMO was approximately $71.5 share.  If you sold on say Thursday as it started to drop at $70 you would have locked in $54,750 profit.  Whoo hoo!

If you bought those 1500 shares back on Monday at $66.18, (spending some of your profit) you would be up on paper today by      $7,860 as the value of the shares is back to $71.42, you would still have your 1500 BMO share and associated dividend flow while  retaining $5,730 cash profit which was removed to spend on something else.  (A nice dinner maybe).

RISK???

Yes, this profit taking has risk, however in the volatile market of the last couple of years, there are a number of large cap stocks for which this market timing practice has shown to be quite predictable  (in hindsight of course).