Market Update: 2008-10-09

Don't panic people! This week's market action was expected, and the week is not over yet! From the stock market open on Monday morning through today's close, the S&P 500 index has dropped 17%. As I mentioned in my posting on 9/29/2008, Sorry guys, no stock market crash today!, these losses were totally within the realm of what could be expected. At this point, I would say that we are within 10-15% of the bottom on the S&P 500. There is significant support around the 800 level. As I mentioned in my Market Alert! today just before the close, I moved cash into the S&P 500 index fund at today’s market closing price. Since the market did not fall as much as I was hoping it would, I held back a bit and only moved between 15-20% of my cash position to the market instead of the 20-25% I was hoping to transfer over. But I will buy more later!

I would like to make an interesting comment about the S&P 500’s support around 800. Just because we have support there doesn't mean that it is going to hold. My guess is that it will hold, but there is always the chance (let's say a 25% chance) that it will not. That is especially true if we end up having a total debt bubble collapse. Today I won't go into all the bad things that could happen in our economy if the entire American financial system was to go bust (as the saying goes, you ain’t seen nothing yet!), or if the People's Bank of China and the rest of the Asian central banks were to refuse to continue sponsoring our federal government's out-of-control deficit spending and lose their appetite for our worthless U.S. treasury debt instruments.

If you go back to the 1980s, normal trend growth of the S&P 500 would actually put the index around 800 today. So if we get to 800, you could say that we are back on track. The only problem is, just as in excessive bull markets stocks end up going substantially above trend, in big bad bear markets stocks can just as easily end up trading substantially below trend. That is why I say that it is possible that this cyclical bear market downturn, which is the second phase of our secular bear market that began in 2000, the S&P 500 could oversell and go below 800.  And if that were to happen, I really don't see any substantial support until we get down to 400-600 level on the S&P 500. Now, that is based on nominal values and not inflation-adjusted values (i.e. adding inflation gains to the levels from the early to middle 1990s). Of course when traders make decisions based on charts, they are not usually looking at charts that have been adjusted for inflation.

So in conclusion, I think we will see another 10-15% haircut before this market downturn is all said and done. My best guess tells me that we will soon find major support around 800. Regardless of where this market bottoms though, I can tell you that if you want to build wealth in the future you absolutely must be committing as much of your paycheck as possible to the markets right now. I am putting 100% of my retirement contributions into stocks (none to the money markets) with the largest percentage going into the S&P 500 index. Just about everybody has an S&P 500 index mutual fund option in their 401-k. It may be called something fancy, like the Vanguard Institutional Index, or the blue chip or large cap index, but you should have access to a S&P 500 index fund in your retirement account.

If you aren't contributing to your retirement, now is the best opportunity in your life to do so. If you are already contributing, now is the best time of your life to increase your contributions. If you don't understand investing, I am sorry to tell you that is not an excuse; if that is your case, simply put 100% of your contributions into the S&P 500 index fund. All I can say is that if you don't buy heavily into the stock market over the next few years, shame on you.  I promise you that you won't know what you missed until it is too late!

I am just so excited to have such a tremendous opportunity to buy stocks right now! I anticipate that we will find this cyclical bear market’s bottom sooner rather than later. Until then, Happy Investing!

Gregory