This week saw the Dow Jones Industrial Average register its worst losses ever, extending October's reputation as a bad-news month for U.S. stocks. With banks failing domestically and abroad, and Iceland -- Iceland? -- on the verge of national bankruptcy, it's hard not to feel panicky about the state of the market.
In fact, not even market professionals are immune. On a routine visit to my dentist earlier this week, the good doctor informed me my blood pressure is high (yes, he's a very thorough dentist). My first response was, "Have you seen the market lately?"
It then occurred to me how much worse my hypertension might be if I didn't have the wisdom of market veterans to rely on each day at the office. With this in mind, I decided to survey a few of of my learned colleagues here at Schaeffer's Investment Research to see what advice they could offer you in the face of this unprecedented market turmoil.
Ryan Detrick, our senior technical strategist, notes that "It's all about a lack of confidence." (In light of the week's roller-coaster Dow ride, this seems to be the case for both bulls and bears alike.) Detrick explains that it's simple economic physics at work: "When you see banks going under in a matter of days, no one trusts anyone else to lend to them. This, of course, leads to a huge economic slowdown and in a very quick fashion."
However, he says, U.S. investors can at least indulge in a bit of schadenfreude. "The reality of the situation is, Europe is probably in worse shape than the U.S.," observes Detrick. "It seems like nearly every day Europe is bailing out another bank. We've had crises before, but this is the first one in our generation that has spread throughout the globe."
So, with panic sweeping the known universe, what's a trader to do? "Don't panic" seems like obvious advice, but our resident blogger and senior equities analyst, Nick Perry, finds that a bit trite. "I've lost count of how many times I've been told that 'now is not the time to panic,'" he says. "This bothers me for two reasons. One, is there ever really a time to panic? Two, it's like telling someone who's on fire to 'think cool thoughts.' In other words, it doesn't help."
While you're busy thinking cool thoughts, Perry also suggests taking a step back before pulling the trigger on a trade. He notes of his shift from floor trader to office-bound blogger, "When I was trading, I could make a trade very quickly, and I sometimes found that I was doing the exact wrong thing at the wrong moment. Many times," he confesses, "I'd look back and realize I was simply caught up in the moment of the market. Writing my blog forces me to slow down and think the scenario through."
Now that you've got the psychological aspect in check, how should you play the market? (Or, as some investors are asking themselves, should you play the market at all?) Our fearless senior VP of research, Todd Salamone, offered a dose of much-needed rational advice in this week's edition of Monday Morning Outlook. He believes there are definitely buying opportunities in the beaten-down housing and financial sectors, but warns, "Stick with the stronger financial and homebuilding equities, but hedge your exposure to these sectors by going short a related exchange-traded fund or going long a related ultra-short exchange-traded fund."
Plus, Salamone cautions, beware the hedgies. "Avoid large-cap technology stocks, such as Research In Motion (NASDAQ: RIMM), Apple (NASDAQ: AAPL), Qualcomm (NASDAQ: QCOM), and Microsoft (NASDAQ: MSFT), which are heavily owned by the hedge-fund community," he says.
And, if you haven't yet learned to use options as a hedging vehicle, there's no time like the present. "The leverage that options provide allows you to put limited dollars at risk in the market, as you can use long-term or deep in-the-money options as a stock substitute," advises Salamone. "Moreover," he adds, "you can profit in both up and down markets."
Finally, I'll leave you with this gem from Nick Perry. "Take everyone, including me, with a grain of salt," he asserts. "This is just simple common sense. The advice given out in the media may come from a great source and be perfectly valid. However, you need to make sure it fits with your goals and risk tolerances."
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.
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Reader Comments (Page 1 of 1)
10-09-2008 @ 12:46PM
chano said...
"We've had crises before, but this is the first one in our generation that has spread throughout the globe."
No, this is a cancer of American Financial Services' incompetence and dishonesty being exported to defraud other savers and investors in other countries.
Let's not try to dilute what happened here and who caused this global crisis.
10-09-2008 @ 1:52PM
paul s said...
Let's see, a pack of cigarettes is now worth more than a share of GM. Panic?
10-10-2008 @ 5:05PM
Shelley said...
If this latest crisis can do anything, let's hope it teaches all Investors (and not just traders) to ALWAYS have an intelligent exit strategy protecting themselves at all times. One that will adjust itself to the stock's behavior and overall market conditions. http://www.smartstops.net
10-10-2008 @ 6:30PM
Honest said...
The total collapse and DEPRESSION we are entering can be laid at the foot of the so-called monetrist economists. These idiots came out of the Univ. of Chicago and infested many universities. Basically, what they pushed was "let the markets rule." Well, you can see what this did. With decent economic planning and appropriate controls, we can come through this but it will hurt everyone but the Wall Street CEO's of AIG and Lehman for example.
10-10-2008 @ 7:00PM
SPARKY said...
What the bail out means to me is I should have never saved and paid my mortgage on time and never pay it off early. I should have used credit cards and only paid the minimum monthly payment .These are the ones getting bailed out with my taxpayer money. Dispicable. Bush, Cheney Paulson. Cox, Greenspan and Bernanke disgraced our country by letting this happen. They gave wall street the goose that laid the golden egg and wall street took that egg and ran with it . Now these same people dont want to take the blame. Wall street and ceo,s caused it what a bunch of crap.
10-10-2008 @ 10:11PM
George said...
Looks like a crash to me.
If you look at the Dow since it was started, and plot its value in constant value dollars you will find an approx. 30 yr cycle(peak to peak). The last peak(in constant value dollars) was in 2001. So you have only about 23 years to get back to where you were in 2001.
10-10-2008 @ 11:01PM
GoldGuy said...
Over the years the market has become more like a casino. Yes it is legitimate to earn while investing in the market. Regrettably, too many "investors" have been "playing" it like a poker game. We are now paying the price for not investing for growth's sake.
10-10-2008 @ 11:30PM
NICK said...
Sure hope the folks stop taking the advice of CRAMMER, the guy told folks awhile back to buy WACHOVIA. And this sucker does this time and time again. But what can you expect he is the water boy for the CEO of GE.
10-11-2008 @ 6:29AM
EMIL J KOVACH JR said...
Commodities Were Run by The Hedge Funds, And The Brokers, On The Side--Playing The Worlds Largest Dice Game, But That's Over, At Least For a while.
OPEC Is united In STABILITY In Their Market, And The Important Players Will See To That.
FOR NOW--The Rest Of The World?
We Have--A Lake (Cash) A Dam (The Banks) And The Valley--Below. The Market. FOR THE CONSUMERS. The Stocks Will Follow The Ability Of The New
Consumer Market--One Of RESTRAINT, And Caution--THEY JUST LOST IT ALL.
When The Dam Breaks--And Opens Up,
The Valley Below--Will Have All The Cash It Needs.
WARNING Does That Mean Instant Inflation--NOPE, The Patient Has To Get Better--First.
Stay Tuned, And Stay away From Speculating In Oil, I Warned You.
EMIL J KOVACH JR
10-11-2008 @ 1:46PM
R.A. Mather said...
When I sw this coming , I got all my assets out of the market ,put it in coffee cans and buried it in the back yard ........not making any thing ,but losing
10-11-2008 @ 8:10PM
R. Key said...
If you have survived this crash, your stocks are still valid, and you can still eat, stay warm, and are receiving some sort of weekly/monthly salary; get ready for the ride up. I have to believe that whatever goes down, will eventually go back up. W. Buffet, T. Boone and the like will make a killing in the next few years. just watch and follow. My heart felt sympathies go out to all living on annuities right now.
10-12-2008 @ 5:22AM
Peter Gottschall said...
http://www.petergottschall.com/stock_market_crash_blog.html
10-12-2008 @ 10:45AM
Poor Man said...
LOL, Sparky says he shouldn't have paid his bills and he could have gotten a bail out to. I got news for you Sparky, ain't nobody bailing out the average homeowner or small business owners. I've owned my home for 20 years, have owned a small business for 10 years and did pretty well until the fuel charges destroyed the economy. I'm not getting a bail-out, my company has all but failed and I'm fixing to lose my home of 20yrs. I've paid more on my home than I've ever borrowed against it. It's sickening to hear folks blame this crisis on the poor slobs who bought into the American Dream. Truth of the matter is we're in the process of giving AIG, Fannie, Freddie, and other financial institutions 1.5 Trillion Dollars. They're still going ahead with foreclosures and to date this year there have been 1.8M foreclosures with 2.8M foreclosures next year because the economic downturn is expected to worsen before it gets better. Divide the 1.5 Trillion by 1.8M foreclosures and you come up with $833K per foreclosure. You think it may have been cheaper to refi those homes at 2% rather than just give 1.5 Trillion to the banks. What's going to happen is those of you who are worried about the folks who have hardships paying their bills will end up in the same boat unless of course you're a financial institute with a printing press in the back office.
10-12-2008 @ 11:43AM
Vic said...
While I've also lost money in this financial meltdown, I'm almost glad that it happened.
Firstly, we now all can be convinced that the stock market is not the way to riches for most people. With the global economy, hedge funds and Wall St. savages, it is confirmed that we are not playing on a level field. The chance of the average person building wealth through the stock is very small. Leave stock trading to the pros. Besides the stock market hasn't done anything in 15 years except give us agita. Why bother.
The same is true for real estate. What a house was worth last year is now meaningless. (The house was never "worth" that much anyway).
We all now have the opportunity to get our own financial houses in order. Watch your spending, increase savings, maintain what you have, keep up job skills and stay away from get rich quick schemes such as the stock markets. Then you'll be alright.
PS. Don't worry about what the so called "experts" tell you. they're losing more money than you.