End of the World or Buying Opportunity?

When the House declined to approve the bank bailout plan today, a stock market that was already headed downward went into a nosedive. The S&P 500 posted its biggest single-day percentage loss since 1987. The losses were broad and deep: 490 of the S&P 500 companies were down, and volume was tilted ridiculously negative. Using preliminary figures, NYSE volume looks to have been about 26:1 negative today. By way of comparison, many traders think a 9:1 down day is a sign of the bottom.

Every equity sector was subject to selling pressure; health care was the best place to be, but only because the losses were comparatively mild. Overseas markets had heavy losses as the banking crisis seemed to spread to Europe and Asia. About the only bright spot today was gold, and even the most precious metal gave up some of its gains in the last hour of trading. Treasury securities rose sharply as investors sought safety above all else. Crude oil plunged more than 10%.

One could argue that today was a “washout” or “capitulation” day. It is certainly true that technical oversold indicators are flashing everywhere. On the other hand, some of those signals were flashing last week, too. Likewise, volatility indicators are showing that investor fear is reaching historically high levels. From a contrarian point of view this suggests the bottom may be near. Yet it is entirely possible for the situation to get worse before it gets better. Picking the bottom of a market like this is very, very difficult. Particularly ominous was that the Dow, S&P 500, and Nasdaq Composite all broke through their Sept 18th panic lows and closed below that level.

Another question mark is that further political interference is almost inevitable in the near future. What form it might take is hard to predict; another coordinated central bank intervention (on the heels of today’s $630 billion injection) is a good possibility. It will also not be surprising if the White House and/or Congress try to cover up their failure to pass the bailout bill with some other kind of nonsensical intrusion.

In other words, just about anything is possible tomorrow. We could see a huge rally, or another sell-off. If you have a strategy, the best advice we can give is to stick to it. Now is no time to make hasty decisions. Be methodical and disciplined while you ride out the storm.