A Methodical Crash

In 1987, the stock market fell 22% in one day.  It was a crash.  In the last 6 trading days, the Dow Jones has lost a little over 21%!  This is a crash.  No question about it.  The only saving grace in this is the warning signs were there and it has given you some time to get out.  I have almost 70% of my capital gains (stock) account in cash.  I also have a very large bond portfolio.  In addition, I have private equity.  So, my allocation to stocks is about 15% overall.  I’m still not happy.  And I’m still nervous.  We are in a free fall that is quite simply amazing.  Technicals aren’t working.  Fundamentals aren’t working.  It’s fear and more fear.  But remember the old adage to “buy when there’s blood in the street”.  Well, there’s definitely blood in the street.  If you’re sitting on a lot of cash right now, you have to start buying something.  There are too many good deals.  But, keep in mind that there are still 2 ways to play this.  A big bounce or an investment.  If you buy good quality companies right now, I believe you’ll be heavily rewarded in the next few months but more importantly in the next few years.  When you have this dramatic of a sell off, there will certainly be a re-test of the lows over some period of time.  Typically months later.  So, we could bounce back up to 11000 and then re-test the lows in the spring.  So, long-term investments can be dead money for some time so they have to be bought knowing you’ll keep them for 3-5 years.

As far as when will this sell off stop?  When you get these kind of drops which are rare obviously, you have to start changing your pictures too weekly or monthly to get some kind of frame of reference for where might some technical level be.  Figure 1 below shows the Dow Jones since 1990.  I think a logical place for this to stop would be around 7700 based on a monthly picture.  That was roughly the same place as 1997, 2002 and 2003.  So, that would be my first stopping place.  That’s one more day the way this market’s falling.  Perhaps the sooner we get there, the sooner we’ll get this over.

Fig. 1
Source:  Tradestation

By the way, I’ve heard some rumors of the Treasury coming out and buying S&P futures.  Probably not a bad move.  At least they’d be buying cheap!  Well, maybe.


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October 2008
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