Wednesday 4 March 2009

To hold on or to give in to panic-selling?

Mr. Cramer had it right in October, even if all he did was tell people something they already should have known: The stock market is no place for money you will need in the next five years.

1 comment:

Guanyu said...

To hold on or to give in to panic-selling?

4 March 2009

(LOS ANGELES) ‘Never sell into a panic’ is a standard piece of advice on Wall Street. Since August, it has been fine advice to ignore.

On Monday we had yet another panic in the market, with no obvious trigger other than the continuing erosion of confidence in virtually everything - the US economy, the global economy, the financial system, the political leadership, the market itself, etc.

The Standard & Poor’s 500 index slumped 34.27 points, or 4.7 per cent, to 700.82, its lowest close since October 1996.

Was it a mistake to sell on Monday? Let’s review recent market history:

• The first major panic of the current financial-system meltdown was the selling wave that took the S&P 500 down 23 per cent from Sept 30 to Oct 10. The close Oct 10 was 899.22. If you would have sold at that level, you would have saved yourself from a further 22 per cent loss through Monday.
• The second major panic, from Oct 20 to Oct 27, took the S&P index down 13.8 per cent, to 848.92. Selling at that point would have saved you from a further 17.4 per cent drop.
• The third major panic saw the S&P lose 25.2 per cent from Nov 4 to Nov 20, when it ended at 752.44. Bad time to sell? Those who held tight are down an additional 6.9 per cent.
• CNBC’s Jim Cramer was bashed by some Wall Street pros for telling listeners on Oct 6 to sell any stock holdings they couldn’t afford to hold for at least five years.
• The S&P 500 closed at 1,056.89 on Oct 6. Investors who took Mr. Cramer’s advice that day have been saved from a further 34 per cent loss of capital.

On Oct 17, billionaire investor Warren Buffett wrote an op-ed piece for The New York Times encouraging people to buy high-quality stocks. He cited his cardinal rule of investing, which was to ‘be greedy when others are fearful’. Since then, the S&P index is down 25.5 per cent.

Isn’t the market dirt-cheap by now? The problem is, it’s pointless to talk about fundamentals such as corporate earnings. As S&P chief investment strategist Sam Stovall concedes: ‘Earnings don’t matter,’ because no one will believe any earnings estimates as long as the economy continues to slide. In the absence of fundamentals, Mr. Stovall says: ‘All we can really go on is the technicals’ - chart-watching - to try to guess where the market might bottom.

He says he believes the market decline should stop somewhere between 625 and 675 on the S&P 500. If the index goes to 625, that would be an additional 10.8 per cent drop from Monday’s number.

Bill Strazzullo, a partner at Bell Curve Trading in Freehold, New Jersey, says investors might have to ponder ‘the unthinkable’ - the S&P back to around 500, which was near the jumping-off point for the spectacular market surge that began in 1995 and continued through 1999.

‘You have to ask yourself, what is the real risk here?’ Mr. Strazzullo says. ‘The thing we are least concerned about is the market running away on the upside.’ In other words, even if the decline stops, he says, he can’t identify a single catalyst that could spark a wild new bull market any time soon. ‘On the other hand,’ Mr. Strazzullo says, ‘I am worried about another 25 per cent to 30 per cent move down’ if panic feeds on itself, as it did last fall.

Mr. Cramer had it right in October, even if all he did was tell people something they already should have known: The stock market is no place for money you will need in the next five years.

That’s as true with the S&P at 700 as it was at 1,056.