down even before the bail-out failed to pass in Congress. The problem with the sell off is the lower volume indicating only small investors are selling off, and the weak numbers in scans overall, indicating institutions are still waiting on the sidelines. Caution is advised.
September is usually a volatile and down month and it lived up to its statistics. October can often be the month when a correction or bear ends suddenly with a steep drop followed by a huge rebound.
Scan numbers on Friday were low across the board. Every scan was well below normal. This tells us that the institutional investors and large lot traders are not doing much at this time. They are waiting to see where this all pans out.
Even with a so-called bailout package, I really dislike that title, the market has work to do. The banking debacle spread wider and deeper than most expected.
What compounded the problem were not just sub-primes which always have gotten front and center stage with the media. The problem compounded when the real estate speculators began pulling out of real estate leaving it in a state of extremely high prices, which were evident in early 2006 and peaked in 2007. We studied the charts way back then, and the rise in commodities prices that was driven by a falling dollar and rising oil prices.
Banks are failing now because customers and investors are pulling out their money in an unprecedented scale. Market Money Accounts which are considered the safest of all investment accounts have seen a huge sudden decline. So suddenly banks that were just beginning to get back on their feet, yes they were coming in with lower earnings but not as bad as the expert analysts had feared, are now faced with a cash shortage. Banks under a customer withdrawal siege were unable to sell off their sub-prime mortgages to other banks to raise capital, nor were these banks able to get short term loans from other banks. All banks were scared a run on their bank would leave them short of cash to meet the withdrawal demands. So the FDIC was forced to step in, meet the withdrawal demands and close the bank. Banks have frozen their lending to one another because of fears of runs from their own depositors.
Right now, the average bank customer and the average money market account fund holder is their own worst enemy because they are creating a huge cash shortage at a time when banks are unable to get loans to meet the demand.
So let's not blame everything on the sub-primes. The write downs last year covered the bulk of these weak mortgages and the banks had done a good job of determining how much to write down. The problem has been the unprecedented exodus from money market accounts and every day ordinary checking accounts.
That is why most experts, including Paulsen didn't see this coming. They assumed that the average person would feel that their checking and savings accounts were safe since the FDIC insures these accounts up to $100,000.00 per depositor at each bank. The experts were confident there would be no runs on banks.
Unfortunately, the news media started hyping up the fact that a handful of people who had more than the allotted $100,000.00 in deposit at a bank were losing their money. The news neglected to say that this was because the person had monies over the insurance limit and that these people should have known better.
Those are the facts, like them or not.
Getting mad is what everyone is doing right now and everyone wants to blame someone. This is also a useless, counterproductive energy draining, emotionally depleting, thing to do.
What I want you to do is not let emotions cloud your judgment.
Back in 2001 after the 9/11 attack everyone thought the markets would not reopen, or that we were financially in ruin. After all we had lost an enormous amount of well educated, experienced, brain power. After the market had been closed for 5 days, something I had never experienced in my lifetime, all professionals wondered what would happen next.
The 2001 low should have been the end of that bear market. This was the technical low that should have been supported by the low of 98. This had peeled off all of the speculation pricing and brought everything back to equilibrium. But what happened next was another unprecedented event. Mutual Fund holders made redemption demands that were so huge all at once the institutions were forced to sell off stocks they didn't want to sell.
This caused a massive sell off that pushed the market down further and it ended at an odd support level, simply because the downside exhausted itself and sellers dried up.
The risk right now is that this could happen again. We had a definite start to a bottom but emotions of the average investor have seized the market creating panic at a time when things ought to be settling out. Uninformed and financially uneducated folks--no disrespected intended--are in control of what happens next for the banking industry, the economy, and the stock market. If they panic even more-and despite the Congressional intervention, we are likely to see more downside beyond the normal support levels for stocks, indexes, ETF's, and funds.
Right now the anger, frustration, and emotional upheaval among the average uninformed bank customer and investor is out of control and people are making foolish and ultimately costly decision for themselves and the economy. The News Media isn't helping and I could strangle some of them.
So what does it mean for you?
Watch your retirement account. You can always move funds in to the money market accounts.
Note: the FDIC was insuring money market accounts up to the $100,000.00 limit but recently increased that coverage to 50 billion to cover all money small investors have in mutual fund money market accounts and other money market accounts in an attempt to stem the massive outflow from these accounts. This makes these money market accounts safely insured. Leaving it under a mattress is inviting disaster into your home. How safe can you secure large sums of money in your house? Not very well. The FDIC is covering the money market accounts. Just be sure and check to make sure your fund is covered.
Also, it is logical to anticipate that interest rates will rise on Certificates of Deposit, and money market accounts. So putting money there is something to consider.
Whatever you do, avoid Gold as it has a Head and Shoulders top on the long term view. And treasury may be safe but it is not a bargain as rates are likely to rise in the near future. Forget oil but I think you should know that by now.
Now that Congress is moving more slowly, we will see smaller investors continue to dump on fear and panic so more downside is likely. If and when the bill passes there may be a short lived rebound upward.
The depth of fear and frustration and anger from the average investors is going to dictate the direction of the market in the near term future. So the market is likely to move down further than it would have prior to the recession/inflation/banking debacle triple slam that hit the economy this past spring and summer. Even with commodity prices falling and costs easing, the anger is strong and can cause the average investor to make unwise choices.
Trading will be higher risk as the market will be volatile and unpredictable. The small uniformed investor and trader do move prices but without consistency or predictability. They are driven by emotion and their selling or buying power is short lived.
The pro traders will jump in to trade against them for profits. And this will create the volatility we are likely to see this week. I do not expect it to be an easy week for trading.
Greed may prompt some traders to risk more than they should.
Whatever is done about the banking woes, this is not something that fixes overnight. But this is an excellent lesson for those of you who have not been through a financial crisis before. There have been several in the past 100 years and every time it ends, the markets are stronger.
This is an election year which adds to the complexity of emotions and expectations. As the election nears, we can expect some quiet periods again followed by a renewed sense of hope which could drive the market upward for a short time.
But the one thing you should not do is listen to the doom and gloom. There is too much scientific and technology moving to market rapidly. For every problem there comes a new opportunity. While the doom and gloom forecast 20 years of bear-which has never formed on any chart-there is no 20 year downward trend on any index chart, you must remain calm and centered. Then you will be able to find the bottoms early and begin preparing for the next move up. Most people listen to the doom and gloom and then totally miss the uptrend and the biggest gains early on.
Meanwhile, if you are new to shorting, go ahead and get some paper trading experience. It may be good for you to paper trade a volatile market just so you can accept what I say and realize that these are very difficult markets to trade. Selling short requires tons of practice so go ahead only on paper or the simulator and gain that experience. When you see that volatility is eating your paper profits then stop and evaluate everything.
Sometimes I find it is easier for traders to accept what I say if they get burned on paper a few times. But newbies, do not think you can get rich on these big down days. It is very high risk right now.
Repeat: I would strongly advise novices and beginners not to try and trade live, or allow emotions to dictate what you do. This is a study of what happens when greed and fear mingle without rational thought. Learn from it, but do not be a part of the greed, panic, fear, or irrational behavior. You are educated investors and traders. I expect you to think things through and prepare and anticipate ahead of events rather than having an emotional knee jerk reaction to everything.
If people remain calm this will be over sooner rather than later.
September is usually a volatile and down month and it lived up to its statistics. October can often be the month when a correction or bear ends suddenly with a steep drop followed by a huge rebound.
Scan numbers on Friday were low across the board. Every scan was well below normal. This tells us that the institutional investors and large lot traders are not doing much at this time. They are waiting to see where this all pans out.
Even with a so-called bailout package, I really dislike that title, the market has work to do. The banking debacle spread wider and deeper than most expected.
What compounded the problem were not just sub-primes which always have gotten front and center stage with the media. The problem compounded when the real estate speculators began pulling out of real estate leaving it in a state of extremely high prices, which were evident in early 2006 and peaked in 2007. We studied the charts way back then, and the rise in commodities prices that was driven by a falling dollar and rising oil prices.
Banks are failing now because customers and investors are pulling out their money in an unprecedented scale. Market Money Accounts which are considered the safest of all investment accounts have seen a huge sudden decline. So suddenly banks that were just beginning to get back on their feet, yes they were coming in with lower earnings but not as bad as the expert analysts had feared, are now faced with a cash shortage. Banks under a customer withdrawal siege were unable to sell off their sub-prime mortgages to other banks to raise capital, nor were these banks able to get short term loans from other banks. All banks were scared a run on their bank would leave them short of cash to meet the withdrawal demands. So the FDIC was forced to step in, meet the withdrawal demands and close the bank. Banks have frozen their lending to one another because of fears of runs from their own depositors.
Right now, the average bank customer and the average money market account fund holder is their own worst enemy because they are creating a huge cash shortage at a time when banks are unable to get loans to meet the demand.
So let's not blame everything on the sub-primes. The write downs last year covered the bulk of these weak mortgages and the banks had done a good job of determining how much to write down. The problem has been the unprecedented exodus from money market accounts and every day ordinary checking accounts.
That is why most experts, including Paulsen didn't see this coming. They assumed that the average person would feel that their checking and savings accounts were safe since the FDIC insures these accounts up to $100,000.00 per depositor at each bank. The experts were confident there would be no runs on banks.
Unfortunately, the news media started hyping up the fact that a handful of people who had more than the allotted $100,000.00 in deposit at a bank were losing their money. The news neglected to say that this was because the person had monies over the insurance limit and that these people should have known better.
Those are the facts, like them or not.
Getting mad is what everyone is doing right now and everyone wants to blame someone. This is also a useless, counterproductive energy draining, emotionally depleting, thing to do.
What I want you to do is not let emotions cloud your judgment.
Back in 2001 after the 9/11 attack everyone thought the markets would not reopen, or that we were financially in ruin. After all we had lost an enormous amount of well educated, experienced, brain power. After the market had been closed for 5 days, something I had never experienced in my lifetime, all professionals wondered what would happen next.
The 2001 low should have been the end of that bear market. This was the technical low that should have been supported by the low of 98. This had peeled off all of the speculation pricing and brought everything back to equilibrium. But what happened next was another unprecedented event. Mutual Fund holders made redemption demands that were so huge all at once the institutions were forced to sell off stocks they didn't want to sell.
This caused a massive sell off that pushed the market down further and it ended at an odd support level, simply because the downside exhausted itself and sellers dried up.
The risk right now is that this could happen again. We had a definite start to a bottom but emotions of the average investor have seized the market creating panic at a time when things ought to be settling out. Uninformed and financially uneducated folks--no disrespected intended--are in control of what happens next for the banking industry, the economy, and the stock market. If they panic even more-and despite the Congressional intervention, we are likely to see more downside beyond the normal support levels for stocks, indexes, ETF's, and funds.
Right now the anger, frustration, and emotional upheaval among the average uninformed bank customer and investor is out of control and people are making foolish and ultimately costly decision for themselves and the economy. The News Media isn't helping and I could strangle some of them.
So what does it mean for you?
Watch your retirement account. You can always move funds in to the money market accounts.
Note: the FDIC was insuring money market accounts up to the $100,000.00 limit but recently increased that coverage to 50 billion to cover all money small investors have in mutual fund money market accounts and other money market accounts in an attempt to stem the massive outflow from these accounts. This makes these money market accounts safely insured. Leaving it under a mattress is inviting disaster into your home. How safe can you secure large sums of money in your house? Not very well. The FDIC is covering the money market accounts. Just be sure and check to make sure your fund is covered.
Also, it is logical to anticipate that interest rates will rise on Certificates of Deposit, and money market accounts. So putting money there is something to consider.
Whatever you do, avoid Gold as it has a Head and Shoulders top on the long term view. And treasury may be safe but it is not a bargain as rates are likely to rise in the near future. Forget oil but I think you should know that by now.
Now that Congress is moving more slowly, we will see smaller investors continue to dump on fear and panic so more downside is likely. If and when the bill passes there may be a short lived rebound upward.
The depth of fear and frustration and anger from the average investors is going to dictate the direction of the market in the near term future. So the market is likely to move down further than it would have prior to the recession/inflation/banking debacle triple slam that hit the economy this past spring and summer. Even with commodity prices falling and costs easing, the anger is strong and can cause the average investor to make unwise choices.
Trading will be higher risk as the market will be volatile and unpredictable. The small uniformed investor and trader do move prices but without consistency or predictability. They are driven by emotion and their selling or buying power is short lived.
The pro traders will jump in to trade against them for profits. And this will create the volatility we are likely to see this week. I do not expect it to be an easy week for trading.
Greed may prompt some traders to risk more than they should.
Whatever is done about the banking woes, this is not something that fixes overnight. But this is an excellent lesson for those of you who have not been through a financial crisis before. There have been several in the past 100 years and every time it ends, the markets are stronger.
This is an election year which adds to the complexity of emotions and expectations. As the election nears, we can expect some quiet periods again followed by a renewed sense of hope which could drive the market upward for a short time.
But the one thing you should not do is listen to the doom and gloom. There is too much scientific and technology moving to market rapidly. For every problem there comes a new opportunity. While the doom and gloom forecast 20 years of bear-which has never formed on any chart-there is no 20 year downward trend on any index chart, you must remain calm and centered. Then you will be able to find the bottoms early and begin preparing for the next move up. Most people listen to the doom and gloom and then totally miss the uptrend and the biggest gains early on.
Meanwhile, if you are new to shorting, go ahead and get some paper trading experience. It may be good for you to paper trade a volatile market just so you can accept what I say and realize that these are very difficult markets to trade. Selling short requires tons of practice so go ahead only on paper or the simulator and gain that experience. When you see that volatility is eating your paper profits then stop and evaluate everything.
Sometimes I find it is easier for traders to accept what I say if they get burned on paper a few times. But newbies, do not think you can get rich on these big down days. It is very high risk right now.
Repeat: I would strongly advise novices and beginners not to try and trade live, or allow emotions to dictate what you do. This is a study of what happens when greed and fear mingle without rational thought. Learn from it, but do not be a part of the greed, panic, fear, or irrational behavior. You are educated investors and traders. I expect you to think things through and prepare and anticipate ahead of events rather than having an emotional knee jerk reaction to everything.
If people remain calm this will be over sooner rather than later.
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