Is this bull crazy enough for you?

Pamplona Running Of The Bulls

The finance blogosphere has been abuzz about the stock market lately, for obvious reasons. The market has been careening around wildly like the drunken bull that it is, and has caused even the most steadfast among us to become nervous. It has caused some of us to jump into action. Whether these moves were unplanned or not, this is a sign of the times. What’s happening to your investments today has no doubt planted some thoughts in your head such as:

  1. Will I lose my shirt? Oh Gawd, when will this end?
  2. How much should I buy? I want in!
  3. Let’s change the subject, I don’t want to begin to know what’s going on with my money right now…

So what camp do you belong to? I’m going to say that I’m in category #2 — I’m in the buying camp. I don’t particularly see an aging bull just yet and my money is on this being just a correction. But we’ll see.

Already, it appears that on the second week of August, the net outflow from mutual funds is pegged at around $13 billion, the most ever redeemed since the 9/11 attacks, when net redemption from funds stood at $16 billion. That comparison says quite a bit. As far as terminology goes, let’s remind ourselves for a moment about how the stock market is typically described:

We’re in a bear market if we’re down 20% from the peak.
We have a correction if we’re down between 10% to 20% from the peak.
We’re riding a bull if it’s up greater than 20% over the span of a year.

Technically speaking, we’ve touched 10% last week in the middle of a trading day so there’s some potential here for more pain in the coming days. From what I’ve seen in the past, as someone who’s lived through several corrections and two bear markets, these things take a while to wind themselves down. So a revisiting of the bottom is likely to occur, especially if bad news continues to permeate our economic and financial atmosphere, and the media insists on dwelling on the negative.

Let’s take a look at what is causing all these jitters and review why the market’s gone to the dogs for now.

Reasons for the Stock Market Gyrations

You may have heard of the basic reasons: it’s the sputtering housing market, the subprime lending mess, tightening credit, weak dollar, yada yada yada. You can also probably toss in the fact that at one point this year we were facing some record highs in the market plus the fact that we’ve been riding a mighty fine bull since March of 2003, making this bull market out to be a four year old. And if things aren’t going to be any different this time, then market cycles dictate we should be expecting this volatility right about now. The bull may not be that old, but it’s still vulnerable to cyclical shake-ups.

So what begun as some credit troubles affecting the housing sector has escalated into some sort of “financial contagion”.

“This is classic financial contagion,” said Russ Koesterich, a portfolio manager at Barclays Global Investors in San Francisco. “You’ve got people in multiple markets. Losses in one force them to capitulate in others.”

So far, as is typical of any correction or bear, the sell out is mostly due to the actions of institutional investors and big money managers (the so-called market makers) who delve in high-risk and complex investments. They bail out while regular investors like you and me stay put. I’m of the mind that it’s the sanity of the small investor that doesn’t make things worse than it already is.

I do, however, get nervous when I read bits like this:

Exotic financial products created from mortgages in the last decade or so are being tested for the first time in a market crisis, pushing investors into uncharted territory. No one knows the full extent of the losses caused by the failure of a mushrooming number of subprime mortgage borrowers to pay back their loans.

But then I remember sitting through the savings and loans crisis, the emerging markets debacles of years past and the massive dot com bubble pop and I say to myself, bring it on! I look at it as just another crisis or just another war or just another financial set back that we all get through at some point. If you can bury your head in the sand when all this is happening, you would save yourself a lot of Pepto Bismol.

So what are we supposed to do to feel better?

All Is Not Lost

We should keep in mind that the market is in the throes of some technical trends brought about by a lot of emotional trading activity. Fundamentally, it’s not supposed to be as bad as it seems:

But the selling went well beyond the day’s events, said Jack Ablin, chief investment officer at Harris Private Bank “It’s all driven by technical factors at this point, because the fundamentals of the market are good,” Ablin said. “But people aren’t really looking at the fundamentals right now. They’re hitting the sell button.”

Georges Yared, chief investment strategist at Yared Investment Research, said the major gauges probably have another 3 to 5 percent selloff looming before a significant recovery is staged. “Credit worries are gripping the market,” Yared said. “This is an environment where it’s shoot now, ask questions later.”

You’d think it wasn’t so bad if you believed that the supposed financial contagion triggered by the exotic mortgage crisis is actually more contained than it’s made out to be. Is this contagion an exaggeration? Is the subprime lending crisis more isolated than people are saying? You’d also probably feel better if you believed that while external forces are out to potentially ruin your retirement, external forces are also around to save the day. For starters, these watchdogs can have a couple of things up its sleeve (like it has in past meltdowns):

What should we anticipate in the coming weeks?

The Fed could cut rates.

After holding short-term interest rates steady at 5.25 percent for more than a year, many investors and other Wall Street pros are looking to the Federal Reserve to cut interest rates at the central bank’s upcoming policy meeting Sept. 18.

Central banks can pump in some liquidity into the monetary and banking systems.

To that effect, the Fed has been adding additional temporary reserves to the banking system, as well as reminding market participants of the normal reserves it puts in place. The Fed added $17 billion last Thursday. Central banks in Europe plowed funds into the monetary system more aggressively than the Fed last week.

Just when you’re starting to think you’re about done with this investing thing, you may be relieved to learn that some things can still bail us out (albeit we don’t want to get into this mindset!). You don’t want to be left out when things turn around. The issue here is whether you’re keeping the faith: that these bigger moves by these even bigger market makers are the right ones. Hopefully this will be enough.

Other Resources:
Dow Makes Stunning Comeback
Why The Market’s Going Nuts

Image Credit: Sydney Morning Herald