Making Money Alert
Not A Green Arrow In Sight
02/28/2007
We witnessed a mega-meltdown in stocks literally across the board yesterday. The Dow plummeted 416 points or 3.3% to end the session with its worst one-day performance since Sept. 17, 2001, the first day the market opened after the attacks of 9/11. There wasn't a green arrow in sight virtually the entire day for the Dow, as all 30 stocks that comprise the index were buried in the red.
Things weren't much better in the S&P 500, as all but three of the index's 500 issues traded lower on the session. To understand the magnitude of yesterday's selling, all you have to do is look at the volume. Out of a total of 2.3 billion shares traded on the NYSE, 2.15 billion traded on the downside. That, my friends, is the epitome of a wave of market selling and it's what we've been warning Alert readers about for some time now.
Yesterday's market freefall should serve as a stark reminder to all of us that risk is inherent in investing. The omnipresence of risk is something that we sometimes tend to ignore, but it seems like whenever we get too complacent about risk, the market imposes a little reality check on us to let us know who is in charge.
One thing we need to keep in mind here is that despite the big sell-off Tuesday, one day does not make a trend. However, I do think that the psychology of this market has been altered as a result of Tuesday's action. Right now, the major market indices are still well above their 200-day moving averages and I think most intelligent investors will at least begin evaluating their exposure to risk.
Investors buying on margin and utilizing other types of leverage have been a key component of this uptrend. And, that extra risk inherent with leverage is a big reason why I've been so cautious during the past six months. Leverage is a great tool in a rising market, but it's also a huge liability when things go south.
I heard a lot of chatter yesterday from pundits who blamed exchange-traded funds (ETFs) for extending the losses and causing the markets to be more volatile than in the past. This reasoning may be the case, but let's remember that most ETFs are held by institutions. Hedge funds are big players in the ETF market. I believe that hedge funds are dominating the daily trading in markets worldwide. If all the hedge funds head for the exits at the same time, then we really will see what big selling is like. And, that situation could cause a complete collapse of equity prices.
I think the next five trading sessions will give us a real sense as to where this market may be headed for the rest of the year, so tuning in to what's going on has never been more critical.
Want to learn how to avoid the ravages of days like we experienced Tuesday? My Successful Investing subscribers were able to sidestep the decline in the Dow, S&P 500 and NASDAQ by allocating to areas of the market that are less vulnerable to the widespread downturn. Plus, our sell discipline allowed us to protect our principal in the areas of exposure that did take a hit.
Now more than ever, risk management is the key to building and to protecting your hard-earned investment capital.
THE DRAGON'S BREATH & OTHER CAUSES
When the Chinese sneeze, the world catches a cold.
That's a great metaphor for what happened yesterday, as a near 9% sneeze in the Chinese stock market precipitated the huge sell-off we saw here in the United States. Weakness in China also did a number on markets throughout Asia.
Shares in Tokyo, Hong Kong, Singapore, Malaysia, Australia, New Zealand, the Philippines and Indonesia all saw big declines following China's meltdown. This should serve as proof that when the Dragon breathes fire, the rest of Asia -- and indeed the rest of the world -- gets burned.
One other factor that contributed to the sell-off yesterday was the growing fear that a breakdown in the sub-prime lending area will cause a weakening in the housing market and a tightening of credit. This is bad news for the housing sector and it is bad news for the equity markets.
Another factor in yesterday's widespread selling was news that economic growth is slowing. The GDP number was revised downward to 2.3% in the fourth quarter, another negative for stocks. We also saw an unfavorable durable goods number. That indicator suggests that the economy is starting to really slow down, as well. Put all of these factors together in one trading session, then mix them with an extremely overbought market that hasn't seen a correction since last July and you get what we got Tuesday.
The best advice I can offer right now is to start taking some risk off the table; that is, if you haven't done so already. Now is not the time to be 100% invested in these markets.
If you want my complete update on exactly where you should be investing your serious money right now, I invite you to become a Successful Investing subscriber.
FIVE FACTORS FOR YOUR FUTURE
There is a retirement crisis in America.
Sadly, most of us have not saved enough to fund our lives after our working days are over. If you are concerned about your retirement income, you will want to pay close attention to the Alert in the weeks ahead. I will be writing about the strategies and issues you need to focus on to achieve the retirement of your dreams.
Here is a brief outline of what I call the, "Five Factors For Your Future."
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Time. Each of us knows his or her age and that number alone tells us roughly how much time each of us has left to accumulate the assets we need.
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Assets. Where are you on that path today? What is your net worth? Where are your largest assets? For many of you, this will be your home or real estate holdings. A problem for many investors is that they have too much money in real estate. How will you tap this resource down the road?
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Savings. We all need to save more money. My rule of thumb is for a person to save at least 10% of what he or she makes. If you earn more than $150,000, you need to save more.
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Annual Returns. What future return on your assets do you expect? Is it more than what the market has given in the past? Do you have a plan to achieve that annual return?
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Annual Withdrawals. It may be too early in your investing life to be worried about how much you will take from your principal each month, but it's never too early to think about how long your money will last.
If you want to know how to address these and other questions, and you are in the Southern California area this weekend, I invite you to attend my Making Money University Live Event. Check below for all the details on what I guarantee will be a very enlightening event.
A "TERMINATOR" MOMENT
Do you remember the "Terminator" film series? If you do, then you know the premise is that computers in the future will become so sophisticated that they will take over everything and begin a war to eliminate the human race.
Yesterday, we had a sort of Terminator-esque moment in the markets, when a computer glitch triggered a sudden plunge in the Dow. This abrupt 200-point drop turned an already huge sell-off into a puzzling descent into red ink.
Dow Jones & Co., the media company that manages the well-known index of 30 blue chip stocks, said it discovered shortly before 2 p.m. EST that its computers weren't properly handling the day's huge trading volume at the New York Stock Exchange.
The company switched to a backup computer and the result was a massive swing in the index as the secondary system took over.
What does this all mean? Well, it means that in the age of computer-run everything, there is always going to be a glitch or two that could adversely affect things. I don't think it's time to bring Arnold Schwarzenegger to do battle with the NYSE's computer systems, but we do need to be on guard against any Terminator-like moments in the future.
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DARWINIAN WISDOM 2
"The most characteristic mark of a great mind is to choose some one important object, and pursue it for life."—Anna Letitia Barbauld, poet
My object of pursuit for nearly all of my professional life has been to understand, to interpret and to teach individuals about the intricacies of the financial markets and how to safely navigate these often treacherous waters. Days like yesterday just confirm that my life's work has real significance. I just want to thank all my Alert readers for embracing my chosen path. I hope to return the favor to you in spades by offering you the soundest, best advice on how to take control of your money and your lives.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars, or anything else.