Tuesday, October 14, 2008

Never Fear, The Bottom is Here!

By Devin Velnoskey

After yesterday’s explosion of 936 points on the Dow it seems as though the worries of last week’s bloodbath throughout the world markets is all but a distant memory. The Dow posted its largest percentage point gain since March of ‘33, giving investors hope that a 10,000 point Dow Jones Industrial Average was still attainable by the conclusion of the fiscal year. To close within striking distance of 10,000 points after touching below 8,700 points and being down 21% last week is something truly unprecedented.

But what’s new considering Friday’s market had a 1000 point swing before it closed down 128 points Friday afternoon? Anything can happen these days when the opening bell rings, the previous two weeks prove it. Volatility is the buzz word on the Street these days but after the Bulls stampeded the Bears on Monday many people think the bottom is in and the worst may soon be behind us if it is not already.

The problems of the credit crisis have mostly dissipated in the minds of many traders and investors. The government’s $700 billion bailout, their backing of inter-bank loans and increasing FDIC insurance, and buying stock in the US banks has, in coordination with similar policy actions throughout Europe, contributed to soaring world markets yesterday.

But not so fast my friend, while all this government action was needed and has eased frozen credit markets, and seems to have solved the crisis, there is still reason to be concerned.

Last week’s triumph of bears was due to more than just uncertainty in the market or the bailout. Deleveraging, coupled with hedge fund redemptions and margin calls, all created the blood red boards seen around the world. And Monday’s stampede of bulls was a result of traders and investors not being able to pass on valuations and bargains throughout the market.

The lack of volume in yesterday’s session means that just as last week there were no buyers, yesterday there were no sellers, so everyone was trying to catch the rising tide for it lifts all boats. Both instances come down to one word: fear. Fear has been driving the markets for the past two weeks, if not longer. When markets were down big last week the fear was centered on what more the government would or could do to ease the crisis.

Monday’s fear was if you didn’t buy you would miss out on the rally and a chance at big money. Markets run by fear are concerning. Whether or not the stock market rises or falls right now is not as important as knowing what fear is driving investors and traders at any given moment. Find the fear, trade it and make the fast money. Miscalculate and you could be taken out in a body bag. The credit crunch may very well be behind us, but there is still the impending recession for monetary and fiscal policy makers to worry about, that is the fear driving markets for the next few weeks.

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