With the Dow breaking down through the 12,000 mark, (finishing today at 11, 971.19), the S & P poised to scrape below 1,300, and the Nasdaq below the 2,300 figure at various times in Tuesday’s markets, investors naturally wonder what’s in store. Many observers, including the oft-quoted Jim Cramer, former hedge fund manager, now columnist and commentator on CNBC’s Mad Money, first expressed enthusiasm that the day’s opening market drop would wash out the excess optimism and put in at least a temporary bottom to even start picking up some financial stocks. When the market bounced back from its 500 point initial drop, however, Cramer felt that this might delay such a bargain hunting, as subsequent hours and days would see the averages drop again. John Bogle, the famed champion of index fund and dollar cost averaging investing, on the other hand, cautioned long term investors to be steadfast and ignore the markets’ turmoil as short term noise.
Historically, what professional traders and institutions would be looking for would be a bottom, whether they find a technical bottom in the averages or simply buying opportunities due to the possibility of grabbing undervalued stocks. First, they must sense that capitulation, a wringing out of the bad news and the excess expectations, has taken place. Small drops in the averages don’t do that.
With the climate of fear evidenced by the popular media and Main Street picking up on the market’s nervousness, a selling climax often follows. Some observers feel the Fed blunted this necessary purge by its intervention with rate cuts, in which case the market has historically been volatile yet without direction. Traders and professional investors with strong stomachs stand poised and ready to profit from this, but historically the small retail, long-term or value investors have often sold out at the wrong times. The other historical implication of a possible lack of selling climax is that the markets will drift downward over the next six to twelve months, forcing small investors daily to watch the painful erosion of their retirement assets or long term holdings; a slow financial torture.
At some point, buy-and-hold does not hold up in such markets, and small retail investors become the last to abandon ship. People who profess not to market time become the ultimate market timers, selling at not only the wrong time, the worst time: at the bottom.
Just like the Fed, critics say; this is always either too early or too late.
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