Catching the falling knife

Today (Feb 27, 2007) saw a 10% drop in the China stock market, which caused at least a 3% drop in most other major stock markets. On a serious decline or plunge, the experts warn us not to invest as the various markets plunged, saying instead to wait for this correction to stablize. The common phrase I've heard (over the last decade no less) is that investing in a plunging market is "like trying to catch a falling knife."

Yet, I've done quite well catching that knife.

So today, I saw the market was down in the morning. Then I happened to recheck the market and realized how far the market had dropped by 3 PM EST (noon PST) and decided to do some knife catching. I picked up various ETFs at near the lows of the day (FXI, ILF, VTI, RWX). It remains to be seen if the market rebounds, and whether I got bargains or the market continues to fall and I got cut by the knife.

I also need to study how often the knife falls below it's initial plunge. I got the impression that todays' fall was simply a sell off with no particularly compelling catalyst. Hence my hope that markets recover.

Update the next day 2/28:

Pretty much everything was up today, the next day. China recovered 4% and the international markets were up about a 1%. The US market was up a tad, too.

In the SJ Mercury lead article, they mentioned there had been 14 single day declines worse than yesterdays decline of 3.3% in the last 40 years. And in 9 of the 14 cases, the markets were up the next day. So you can catch the knife more often than not.