WHAT NOW?

Over the past month, it has been easy to assume that the selling is never going to let up, even temporarily. Support and resistance don’t seem to matter, moving averages don’t matter, and all anybody can talk about is how low it can go. However, you have to ask the important question: Is this amount of selling really warranted?

During emotional times in the market, moves can become based on fear and fear alone. And during these times, it is your job to figure out when enough is enough in terms of the market’s discounting of what “could” happen. It is vital to be able to identify the drivers of the action. You need to identify what is real and what is based on uncertainty.

Within 15 minutes of the open on Tuesday these questions became even more important.. With the market suddenly down ANOTHER 300 points, and any and all support levels broken, it was time to ask the hard questions. With the S&P 500 down 14.5% from its high of April 23rd, it was rational to believe that we deserved a bounce very soon. However, if we missed something, and the market was instead discounting what “was” happening, then it was time to welcome the bear.

Will the debt mess in Europe create another economic slowdown around the globe? Again, these were the questions that needed to be asked Tuesday morning at 9:40 am eastern time with the Dow down -292 points. While things can definitely get worse in Europe, it is critical to understand that this time around, policymakers know what is happening and what to do. So, while the swap spreads in Spain and overnight LIBOR rates are definitely on the rise, they are nowhere near the levels seen in 2008. While credit markets are tightening, they are still functioning. And understand that if conditions in the credit market tighten much further, there is VERY strong chance you’ll see the Fed, the ECB, and just about every other central bank around the world step in and take action to reinforce the idea of “don’t fight the fed.”

If you assumed that a 14.5% decline discounted an awful lot of stuff that “could” happen, then a bounce was inevitable. I’m not sure how far it will go or how long it will last, but things got a little excessive yesterday. and as I stated recently in another article: “But during these highly volatile markets it is important to remember that when they sell off they sell off with a vengeance and when they buy them they run them up, way too far, way too fast.”