Monday, August 22, 2011

Panic or what?

In case you haven't seen the picture, here's an insight to stock market movements.

Now take a look at the S&P500 stock index for the last 5 years.

Are we still in denial? Have we gone through panic already? Are we ready to capitulate? The only way you would know is if you felt sick each morning and you are ready to sell with whatever losses. Stock markets usually rise much slower then they fall. If you are a long term investor (2 years or more) then you wouldn't need to worry too much since eventually the markets will bounce back and we can start waiting for euphoria.

The bottom of 2009 came after the financial world as we know it was about to end unless lots of tax payers money was used to bail out some of the biggest banks in the world. Our current fears are driven by uncertainty and possibility that we might be heading for a recession again. The fundamental situation is not as bad than it was two years ago which makes me think that we will see the hopeless despondency phase (the bottom) much higher than in 2009. We might already be in a depression phase.

It is dangerous to catch a falling knife though so I would wait until we have seen some stability and strength in the market before I would start shopping for bargains again. There is nothing rational about market bottoms. Volume levels are also important since that is an indicator of smart money entering (or leaving) the market.

On Friday Ben Bernanke from the Fed is about to deliver a speech on economic conditions. While we probably won't hear QE3 or something similar announced we will get a pretty good picture on how the Fed sees the situation in economy. I think we will see some speculation on the markets before that. If you see markets rising this week then make sure you won't fall to "sell-the-news" reaction. Whatever the news are, we will probably see some selling action assuming there will be a lot of green this week.

Keep your head cool, your emotions in tack and we will see some news pretty soon.

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