Here's a playbook for buying in the aftermath of big market losses

Published Tue, Mar 10 20202:21 PM EDTUpdated Tue, Mar 10 20205:35 PM EDT

Investors trying to capitalize on the stock market's sharp decline can turn to the financial crisis for some pointers, DataTrek Research's Nicholas Colas said Tuesday. The S & P 500 had its worst day since 2008 on Monday, dropping 7.6%. The Dow Jones Industrial Average also had its biggest one-day percentage drop since the financial crisis, closing down 7.8%. Those losses left both major indexes on the cusp of entering bear market territory , down nearly 20% from their record highs set last month. Those losses were sparked by rampant fears of the coronavirus slowing down the economy and an oil price war between Russia and Saudi Arabia. While the downward move was violent and left a dent in many portfolios, it could be a buying opportunity for some investors. For those brave enough to buy in this volatile market environment, Colas advises using the "financial crisis playbook." "That may sound extreme, but unless Russia and Saudi Arabia quickly reconcile, oil prices point to deflation and COVID-19 still threatens the US/global economy with at least a short but sharp recession," Colas, the firm's co-founder, said in a note to clients. "That was the recipe for [Monday's] … 'crash' in US equities, and it is a systematic problem." Colas noted that investors with a time horizon of at least 12 months should buy the market the next four times the S & P 500 falls at least 5% in a single day. He pointed out that investors who bought into the S & P 500 the first five times the index closed down at least 5%, they saw a one-year price gain over the next year. Colas added, however, this strategy requires "a strong ability to weather possible drawdowns," meaning it's not for the faint of heart. "There is much less room for monetary stimulus to have an impact now and fiscal policy will need to take the reins (and quickly)," Colas said. "That leads us to a 2008-like environment where DC wrangling/Congressional votes on fiscal measures could whipsaw markets." Investors got a taste of this whipsaw action on Tuesday. The Dow rallied 945 points before those gains evaporated before noon ET. By around 11:40 a.m. ET, the 30-stock average traded at its session low, down 160.68 points. The Dow later rebounded to trade about 300 points higher. The S & P 500, meanwhile, surged 3.7% on Tuesday before trading down as much as 0.5%. It later rebounded off those lows. For investors with a lower risk tolerance, Colas advised buying between the fifth and 11th decline on the S & P 500 and "only tiptoe into this market."

Investors trying to capitalize on the stock market's sharp decline can turn to the financial crisis for some pointers, DataTrek Research's Nicholas Colas said Tuesday.

The S&P 500 had its worst day since 2008 on Monday, dropping 7.6%. The Dow Jones Industrial Average also had its biggest one-day percentage drop since the financial crisis, closing down 7.8%. Those losses left both major indexes on the cusp of entering bear market territory, down nearly 20% from their record highs set last month. Those losses were sparked by rampant fears of the coronavirus slowing down the economy and an oil price war between Russia and Saudi Arabia.

While the downward move was violent and left a dent in many portfolios, it could be a buying opportunity for some investors. For those brave enough to buy in this volatile market environment, Colas advises using the "financial crisis playbook."

"That may sound extreme, but unless Russia and Saudi Arabia quickly reconcile, oil prices point to deflation and COVID-19 still threatens the US/global economy with at least a short but sharp recession," Colas, the firm's co-founder, said in a note to clients. "That was the recipe for [Monday's] … 'crash' in US equities, and it is a systematic problem."