As of midday Monday, the Dow had rebounded off early-session lows, but if investors / readers are thinking about entering this market now, caution is advised, for several reasons. First, those familiar with technical analysis know that the Dow's rebound to a loss of 180 points to a level of about 11,233, up from a loss of more than 300 points, could be just short-covering.
Second, major unknowns exist regarding the financial system. And I mean major.
The fate of American Interational Group (NYSE: AIG) remains an enormous question mark. The largest insurer of assets, AIG may face a downgrade that would trigger a collateral call from debt investors who bought credit default swaps, a form of insurance for bonds. Further, if hedge and other institutional investors sense those swaps are not in force, they may seek swaps elsewhere and/or sell assets to reduce market risk / raise capital. That could spark a new round of stock selling. AIG's shares fell $5.33 to $6.81 in late Monday morning trading.
Moreover, there's no consensus regarding whether the U.S. Federal Reserve would intervene to support AIG, if its business model becomes severely stressed. Does AIG meet the Fed's 'too big to fail, too interconnected to fail' standard? Point: A Fed intervention / non-intervention would create two dramatically different investing environments.
Finally, the U.S.'s economic fundamentals remain weak. Even if the market weathers the current financial storms -- to say nothing of further, as-yet unknown, hiccups in the financial / banking sector -- the U.S.'s economic fundamentals remain non-growth-oriented. Market bears ask: how can the market rise, long-term, if more people are joining the unemployment ranks each month? That would imply more mortgage defaults. It's a pretty strong argument for, at minimum, sluggish stock market conditions, for the immediate quarter ahead, at least.
Market Analysis: Caution is advised. One always defers to the judgment of professional / experienced traders, but unless you fit that bill, given the number of unknowns in this market I'd stand aside until the dust settles.
Why is gold making a new high, trading at $1,118.00 per ounce?
Chasing Value: Ten stocks for 2010 -- Part 1 
Closing Bell: A six-day rally (AIG, REGN, M, MOT, PALM, RIMM)
Reader Comments (Page 1 of 1)
9-15-2008 @ 11:56AM
Warren said...
"Caution is advised. One always defers to the judgment of professional / experienced traders, but unless you fit that bill, given the number of unknowns in this market I'd stand aside until the dust settles."
Caution is advised if you speculate. If you buy index funds, as most people really should, this is buy time. In 5 years, the cheap shares you get today will be worth WAY more.
Invest now for your futures while it's all on sale. Sitting on the sidelines is just plain foolish advice, IMO.
9-15-2008 @ 12:56PM
william lindblad said...
About 3:45 we all get to see.
a.) market holds
b.) market goes deep South.
9-15-2008 @ 7:32PM
william lindblad said...
I left this blog up so I did not have to hunt for it. It is now 7:30 and the answer is known.
This week has all the indications of a bloodbath, especially if the shorts are overwhelmed.
Caution is not the word - run is better.