Market Madness – 3.19.2007

Now that was quite the kick in the pants. The premarket looked good, and it was a gorgeous follow through all day. The Dow was up 115, NASDAQ 21, and the S&P almost 15. You would almost think that times were good!

It was just a few days ago that a slew of bears had come out of thier dens ready to create a panic selling environment. Sub Prime fears, stagflation, tsunami ARM issues, IRAQ war deficit and even global warming have been used as excuses why this market should see lower lows. Last week’s action was concerning on the heels of the 2/27 sell off. But what are we to make of this? Bottom feeding, vultures or stupidity?

Today, the New York Stock Exchange had 66 new highs registered with only 6 new lows and the NASDAQ had 39 new highs and 24 new lows. Just a few days ago investors were looking for every reason to separate from the market and today it seems like the love affair is back on.

What is really interesting is how important the foreign markets seem to be in shaping the early part of the recent trading days. We have seen an interesting change in the mentality of investors who usually view the US markets as the one to follow. As the world gets smaller, markets have been put on a more even par in terms of importance. This has been the result of emerging markets…well emerging…

In my book (titled The Disciplined Investor of course), the subject of investor’s emotions is explored. What has happened of late is a move towards the emotion of fear. The fear of losing. As we are seeing a kink in the armor of the economy, concerns have been mounting. The focus is on the end of the hay day when Real Estate prices move up without regard to any real fundamentals has. The result of which is a country severely overdependent on credit.

To add insult credit was loosely granted for all who wished to borrow – even to those who should not have qualified due to past credit history or income requirements. Sub-Prime lenders, one of the biggest culprits, are a form of modern day loan sharks. They have looked the other way at any guidelines for loans and gave away money while utilizing poor underwriting and even worse foresight. This is why there is so much concern with the credit markets and the investors are reacting to this realization.

While it is clear that the markets are resilient, there is still the important need to re-evaluate risk once in a while. Remember, EVERYTHING IS CYCLICAL.

It may not seem that way when we are in the throws of a recession or a market boom, but each has its own way of eventually turning a corner and moving in another direction. Yet emotionally, we look at these as constants without change. That is why disciplines in the investment process are so valuable. By removing the emotional overlay, better investment decisions can be made. You know exactly what I am talking about. We have all made decisions out of fear and/or greed, usually to our detriment.

The extreme volatility of late is an emotional response to real concerns that have been magnified by the recollection of a horrible time that was experienced a mere 6 years ago. There is no need to revisit that here, but from many discussions I have had with investors, it is apparent that no one is willing to give back what has been such a struggle to earn since 2002. That period was too painful for many. Remember, as fast as millionaires were made was as fast as they were broken.

So what does this mean to us? The market is telling us something if we listen to it. The volatility is calling out an approaching change. This could go either way, but there still seems to be a good amount of good news out there. Sit tight and wait for Wednesday’s Fed decision to get a good idea for which direction we should be heading. Then move forward with the plan, without emotion.