Thursday, August 23, 2007

Have we made the turn in the markets?

As I look at the recovery attempts trying to made, by the markets this week, I am reminded of the sophisticated concept called, “The Dead Cat Bounce”. This very descriptive, if not gruesome phrase, referrers not to how high a dead cat will bounce if you throw it, but rather as to how far the markets will rebound after a significant correction like the one just completed.

Investor psychology is a very fragile thing. When the markets are going up anybody can make money and believe they have the ability to do so, but let the markets turn vicious and investors panic. I was talking to a client recently about the volatility and the decline of the markets and the impact of people's portfolios. He made the comment that it is much easier to recover from a decline of 1% to 2 % than that of 10% or more, seems obvious but most people do not think that way about what it takes to recover from a significant decline.

The 40% decline in the markets around the turn of the century lost a great many people a significant amount of their investments and many have yet to recover their loss. This most recent decline should remind people that stocks do have risk and you can loose money. The concept of risk is what he correction was all about, quantifying the risk that you are taking with your money has now changed.

I am being asked what I think the next move might be for the markets? I think it is possible to suck a great deal of money back to the market from the sidelines by the markets moving back to the previous high around 14,000 on the Dow Jones. It is possible that this could happen over the next 30 days but I would be concerned about the markets prospects if in fact we do go back to the previous high very quickly.

If we go back to the 14,000 level and can’t move strongly through that level then I think the markets could see a decline in October greater than the decline experienced in early August.
No one knows for sure the outcome of the September Fed meeting. The futures markets are strongly suggesting that the Fed will cut the important Funds Rate by 50 basis points. This predictor has been very accurate within 30 days of a Fed meeting. I think there is chance that unless something dramatic happens the Fed will not cut the funds rate in September. This disappointment may well be the trigger the sets the market into a significant decline.
Dan Perkins

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