Market Alert: 2008-09-29

Pardon me for posting three times today, but I just want everyone who follows my commentary to know what I am doing at a time like this. And definitely be sure to read my obituary to Wachovia Bank that I posted this morning.

About 3:20pm today I got really excited.  The major indexes had all breached their earlier lows of the day and looked set to crash. And then, they didn’t. Bummer! Both the S&P 500 and the Nasdaq Composite ended down 9% on the day, which is just a hair away from the technical definition of a crash. I was hoping today would be the first U.S. stock market crash of my adult life. The last crash was in 1987, so I didn’t have any money on the table then.   

A stock market crash is generally defined as the major indexes falling 10% or more in one trading day. The reason I want a crash is twofold: 1) to really put the fear in the market and everyone who has been willing to prop up U.S. stocks and deny that we have fundamental economic and financial problems for such a long time, and 2) since I built up a decent part of my portfolio in cash over the past few years, I am ready to buy some stocks at fire sale prices!

Right before the close today I picked up a little more FXI (China) when it was off more than 13% for the day and some more XLK (Technology) when it was down more than 7% for the day.

As far as a crash and true fire sale, I guess I will just have to wait a bit longer. Even if we don’t get a crash, I still think we are now moving into our next leg down in this bear market. The S&P 500 doesn’t have much support between today’s close of 1106 and its bear market low just under 800 in the fall of 2002. And if you look at a long-term chart of the S&P 500, I swear it looks to me like it is making a perfect long-term, double top formation; the first top was above 1500 in 2000, the cyclical bear market bottom was just under 800 in 2002, and the second top was above 1500 in 2007. All I can say is if this chart decides to complete drawing the secular market double top, then we better go ahead and adjust our psychology and be prepared to watch the U.S. market shave another 25-30% off of today’s close. Of the three major market indexes, I would say that the Nasdaq Composite will likely fair the best from here, but even it could go much lower.

So when you look at your online brokerage and 401(k) statements tonight, don’t get upset and think about “how much money I have lost” because that is in the past now. Instead, what you should be asking yourself tonight is how you will feel if you lose another 25% of what you have right now. I am not saying that this will happen, I am just saying that as of this afternoon the probability that it will happen has just been taken up a notch, or three.

Moral to the story: ALWAYS HAVE SOME CASH ON HAND. You should put aside part of your savings to cash during bull markets, and be willing to spend that cash in a bear market. After all, if you didn’t build up any cash during the past few frothy years on Wall Street, how are you going to buy stocks now when they are on sale?

We will know more about how much meaner this bear can get and when stocks will find their bottom later. Until then, Happy Investing!

Gregory