Tuesday, March 18, 2008

Market Recovery?

Market experts see signs that the bottom may be near shares the perspective of several economists and strategists that the market bottom is likely in the second quarter of 2008. In addition, the Fed intervention in the Bear Stearns liquidity crisis and today's 0.75% Fed funds interest rate cut has given stock market investors some confidence, based on the 420 point gain in the Dow.

I think I am still going to wait before putting any additional funds in the market and will continue holding current investments. If I do sell any positions, I will keep the proceeds in cash. At this point, I think the market and economy is still on an overall downward trend with occasional rebounds like today's 420 point bounce. Here are my reasons for being skeptical the bottom is near:

  1. The market rebounds have not been sustainable. While each Fed intervention has helped slow or reverse the market decline, the impact has been relatively short lived and requires a bigger action for each successive intervention. As this chart shows, Fed actions have been not changed the direction of the market.

    In addition, based on the new highs/new lows data, I believe today's rally was more due to short covering than investors jumping back into the market.

  2. More or bigger issues are still to come. The credit crisis will continue to be wider and deeper than expected. What appeared to be only a mortgage and foreclosure issue quickly grew to be a crisis for businesses. First it was only mortgage companies (e.g Countrywide and Thornburg), then came the bond insurers (e.g. Ambac and MBIA) and now an investment bank, Bear Stearns. I wouldn't be surprised if there is a bank or municipal bond crisis before the bottom happens.

  3. There is still not enough fear. The Bear Stearns collapse is being positioned as an isolated incident and the Goldman Sachs and Lehman Brothers earnings reports have given people more confidence the issues won't spread. Yesterday, someone told me that equities seemed cheap and his plan was to use a home equity loan to invest in the stock market. Overall, there seems to be concern, but a belief that the government will save us.

In 2002, I learned the pain of continuing to buy during a market downturn. Two of my lessons were: 1) Cheap stocks can get cheaper and 2) Some stocks will never recover. While I did buy some stock in January and February, I will not purchase any additional equities until the market has clearly achieved a turn around. We will continue maintain our investments with our financial advisor, avoiding the issue of "buying high and selling low." Finally, while I still have not identified any candidates, I will continue to look for opportunities to short stocks during the next rally.

For more on Ideas You Can Use, check back every Tuesday for a new segment.

Photo Credit: Wikimedia Commons

This is not financial advice. Please consult a professional advisor.

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