Insights & Advice

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The Week That Was

Six Flags took a back seat to the global stock markets this week as investors hung on for dear life. It was a six day panic-filled roller coaster ride that began last Sunday night overseas. As American investors tried to enjoy the Martin L. holiday some foreign markets were experiencing double digit declines.

Who knows how bad it could have been if Gentle Ben Bernanke, Chairman of the Federal Reserve, had not stepped up to the plate before Tuesday’s opening with a surprise ¾% cut in both the Fed Funds and Discount rate. And yet, by Tuesday afternoon, the U.S. stock markets was still down another 3% and heading south with freight train speed. By Wednesday morning, panic permeated Wall Street. At 3:30 that afternoon, the Dow was down a couple hundred points. It looked like the end of yet another dreadful day.

And then, as markets will do as they approach a market bottom, the averages reversed course and in less than thirty minutes the Dow Jones finished the day up 298 points. Both the NASDAQ and S&P 500 recorded similar percentage gains on huge volume. The uptrend continued into Friday. So what happens next?

Over time I’ve learned a bit about volatile markets since I’ve lived through a dozen or so in my career and here’s my check list in identifying a market bottom.
Panic must be present. Clearly, throughout the early part of the week a worldwide panic did grip the markets.

There must also be an overwhelming bearishness among the Talking Heads of the media and many market sages. Heavyweights like Jeremy Grantham, George Soros, Paul Volcker, Alan Greenspan and Mort Zuckerman have all joined the media chorus in expressing how concerned they are about the markets and the economy. That condition appears to be satisfied.

Volume must be extraordinary. On Tuesday, volume on the New York Stock Exchange soared to 7.4 billion shares. If you add the volume on NASDAQ and Wednesday’s total we registered nearly 11 billion shares traded. That, my friends, is volume extraordinaire.

The market must ignore bad news. Market mover Apple Computer reported earnings on Tuesday which proved a surprise disappointment to The Street but the market ignored that and moved higher. Still, I admit that this point is still in question.

So some of the conditions necessary for a market bottom are in place but that does not mean we’re out of the woods yet. Normally, investors will retest a bottom once, twice, even three times over the course of a few weeks. That could happen so I would not get carried away by a few up days. Better to wait and start to nibble when the market retests the lows. There is still a lot of bad news out there like Thursday’s report that the median price for a single –family home dropped for all of 2007, the first time in 40 years. But we will also to begin to hear a little good news too like the bipartisan $150 billion fiscal stimulus plan. Individuals who earn $75,000 or less will receive an additional $600 in their pockets by this spring. That should help consumer spending and stimulate the economy. I expect the news and the markets will be mixed in the weeks ahead.

Bottom line: take the long view. The interest rate cuts by the Federal Reserve which began in September of last year will begin to positively impact the economy by this fall. The markets should begin to discount that even sooner. All we need now is time and some patience.

Posted in A Few Dollars More, At the Market