October 8, 2008, 6:00 am

The Sky Is Falling…

by: The Financial Blogger    Category: Investment, Market and Risk,Trading
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The above graph is not one of a penny stock collapsing over the last month. Not quite… In fact, it is the graph of the Dow Jones Industrial Index, one of the more known indexes and most discussed by mainstream media. While it is certainly a great way to gather what’s happening in the economy, a lot of traders and managers actually prefer looking at the S&P 500 a lot more. Why? A few reasons. First, the Dow Jones has only 30 companies in the index, the biggest generally in the most important sectors of the US economy.

Not bad but that usually makes for a rather steady index as it includes only “big big caps” meaning, the biggest and most mature companies. So the Dow Jones is usually seen as an index that is very stable. In fact, a year ago, variations of over 100 points were seen as important and almost volatile.

Forward that one year later and we now have an index that has lost 1400 points in the last 5 trading days, simply unthinkable not too long ago. And what about the Dow Jones being stable? You can simply look at the past 2 days of trading to see huge intra-day variations. At one point yesterday, the index was down a record 800 points, but ended up losing a bit less than half of that.

Movements are violent and a lot of the better traders and portfolio managers that we know are now not even trading, as they do not think it’s possible to make sense of this market. It’s almost like playing the casino right now. Think the market will go down.. think twice about going short the market (imagine a joint announcement of decreased rates by major central banks for example)…

These markets are as violent as they have ever been and it’s very difficult to come to any conclusion right now except that a lot of what is going is irrational.

There are major problems in the current US economy, that is for sure. But how much of an impact will this have on the market and how much of it is already priced? Let’s hope the worse is past us…

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Comments

Ok Chicken Little.

Personally, I believe the Dow will hit 8000 before it starts to turn around. If it wasn’t for the bailout, I think it would hit about 8500. We have already seen the companies that got the money use it for company trips and vacations for the execs.

Heck, the AIG execs got a one week trip to a spa after getting the 85 Billion.

And before anyone asks, yes I have a crystal ball. It’s only right about 70% of the time, but it works!!!

There are always downturns/corrections in the markets. That is why you should always be prepared. With Emergency funds and diversified investments. As you get older, you should be moving away from stocks. Look at this interactive graph from Harvard Business Online:

http://harvardbusiness.org/flatmm/hbextras/200805/recessions/

by: The Financial Blogger | October 8th, 2008 (11:24 am)

Chicken,
I think the guy needed a rest before gettin a heart attack 😉

corrections are the best times to invest :-0 I just wish I had more liquidity!

Wow! This is a great time to buy great companies. Apple, GE, etc. Love it.

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