Insights & Advice


The Worst Kind of Decline

Bear market corrections usually end with a bottom. If you have been in the markets long enough you know what to expect. It is a grand finale of sorts where panic roars through the trading floor, grown men cry and fortunes are won or lost in seconds. Volume explodes, stocks markets make new lows, and you feel like you are free falling off the Grand Canyon without a bungee cord. We are not there yet.

Over the last year dozens of newsletters, media personalities and market professionals have had to wipe the egg from their faces after attempting to call such a bottom, present company included. There was one, two-week period last year where I was sure it was over and said so before reversing course with a printed apology. Fortunately, even the most arrogant of us are learning to keep our mouth shut.

This week the market declined substantially with the Dow making eleven year lows while the NASDAQ and S&P500 flirted with levels last seen in November. As I wrote last week, I expect the S&P to follow the Dow down and decline to 680 which would be a new market low for that index. We are well on the way to that level. I’m not calling that a market bottom, just a target or way stop that may or may not prove to be the end of our journey. And as usual the financial sector is leading the way downward.

Stock prices in that sector are in a tailspin. I have déjà vu whenever I look at Citibank below $2.00/share or Bank of America under $3.00 where they were for a brief time on Friday. The stocks of Fannie Mae and Freddie Mac, the mortgage giants, acted in a similar fashion last year just before they were effectively nationalized by the Federal government. It appears that the markets are going to force the government’s hand by driving these bank stock prices to a level where the only alternatives are bankruptcy or nationalization.

In the meantime, there appear to be few safe havens in this market. I neglected last week to mention gold and silver, these two commodities are twin towers of light in an otherwise darkening landscape in my opinion and belong in your portfolio. Both metals have had quite a run however and are due for a pullback so wait until a sell-off before buying. The dollar oddly enough is also making gains as are U.S. Treasury bonds. Although I think both the dollar and Treasuries will have problems in the future, in the short term, especially in market downturns like this week, they function as ‘flight to safety’ investments.

What bothers me most is the orderly way that markets are declining. Volume this week was not extraordinary (although Friday’s did pick up somewhat), there was no fear or loathing, the new lows kept piling up and although the markets are deeply oversold, they continue to decline. After trading within two points of last year’s low, the S&P bounced back somewhat. Traders are already looking for an oversold bounce next week, which if it occurs, they will short once again. It’s almost business as usual on Wall Street which definitely says to me we go lower.

Posted in A Few Dollars More, At the Market