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Five Big Investing Lessons From Today’s Stock Market Sell-Off

Dow Jones futures were little changed late Wednesday, along with S&P 500 futures and Nasdaq futures. During the regular session, growth stocks sold off sharply. Eleven IBD 50 stocks, from Adobe Systems (ADBE) to World Wide Entertainment (WWE), fell below buy points. Several other top stocks or former leaders suffered heavy losses. Workday (WDAY) and RH (RH) plunged after earnings reports. Netflix tumbled from a key resistance level. And Facebook (FB) and Tesla (TSLA) are at their weakest point relative to the S&P 500 index in more than a year.

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The selling continued late. Guidewire Software (GWRE) and hot IPOs DocuSign (DOCU) and Zscaler (ZS) all fell in extended trading even though they topped earnings views. Guidewire stock and DocuSign stock had closed Wednesday slightly above buy points. Zscaler stock had finished just 1 cent below its entry point.

Wednesday’s action before and after the close teach five valuable lessons for investors:

1. Even Top Stocks Follow The Stock Market

Don’t think your stock will be immune to a market slide. Most stocks follow the market. Growth stocks tend to outpace the market’s gains, but also its losses. Sure, a few standouts like Apple (AAPL) will barely budge in a broad sell-off, but the odds aren’t in your favor.

Don’t read too much into Wednesday’s slide. The S&P 500 index and Nasdaq composite are just below record highs, with the Dow Jones not far behind. The stock market remains in a confirmed uptrend.

2. Be Afraid When Stock Market Fear Disappears

Several indicators in recent weeks have signaled that investors were becoming complacent, with bullishness reaching unusually high levels. That’s often a sign of at least a short-term peak. If everyone is bullish, who’s left to buy?

3. Buying Before Earnings Is Risky

Sure, if you’d bought Apple stock just ahead of its July 31 earnings, you’d be sitting on a tidy gain. But there’s a high risk for that potential reward. RH stock plunged 13% following its late-Tuesday earnings. That’s after a sharp reversal from a brief breakout attempt Tuesday morning.

If you do want to buy a stock heading into quarterly results, consider an earnings options strategy to take advantage of any gains while limiting your downside risk.

4. Relative Strength Absolutely Matters

As an investor, you don’t want to buy a stock that just moves along with the broader market averages. You might as well buy a mutual fund or ETF for the S&P 500 or some other broad market gauge.

Therelative strength line, which tracks a stock’s performance vs. the S&P 500 index, is a good way to identify true leaders and laggards. A rising RS line means a stock is outpacing the market. A falling RS line marks a laggard.

Apple stock’s RS line, after a long stretch of sideways action, has boomed since the July 31 earnings report.

Meanwhile, Facebook stock fell 2.3% to a four-month closing low. Tesla stock sank 2.8% to its worst levels since late May. On a weekly chart, the Facebook and Tesla RS lines are at their lowest levels in more than a year.

5. Stock Market Futures, Overnight Action Doesn’t Always Carry Over

It’s not a good sign when a stock sells off in late trading. Workday and RH stock fell sharply late Tuesday and that carried over into Wednesday.

But HealthEquity (HQY) rallied after signaling significant losses overnight. Dow Jones futures and Nasdaq futures indicated slim losses heading into Wednesday’s session, giving no indication of big, broad losses in growth stocks.

Dow Jones Futures Today

Dow Jones futures edged lower late Wednesday. S&P 500 futures were below break-even. Nasdaq 100 futures were just above break-even.

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