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October 2008



Riding the Wave

October 10, 2008 – Comments (0) | RELATED TICKERS: QID

Well, things don't look like they could get any worse in the market.

Expect them to.

The general un-winding we're seeing in the financial markets will likely take some time. We're going to see continued bank failures and underwhelming corporate profits. There will be rallies and subsequent drops when bad news hits. However, I feel you should take the following advice.

Take a deep breath, don't panic, we'll get through this. There's a lot of cash redemptions in the market right now. In my opinion if you don't need cash liquidity in the short term that's the worst plan of action. Why? Because invariably the people taking cash out will re-invest their money when the markets slightly rebounded.

This could prove to be a fool-hardy proposition. If you study previous recessions there's normally a rally following a bear market that stalls and the market returns to its original low. So if you're an investor who is waiting out on the sidelines right now who reinvests at 10,000 there's several risks. #1- You would miss any capital accumulation while waiting for the markets to "rebound". #2- As mentioned earlier, there's been a pattern in recessionary time periods for the market to have aborted rallies after steep declines.

Of course, there's no guarantee the current crisis will follow previous trends. Each financial bear market is the result of unique circumstances.

However, now is not the time to try market timing. We're not seeing pricing based on fundamentals. Market timing is a dicey proposition in an irrational market driven in large part by fear. Notice how the market loses most of its value in the final hour of trading. This is the result of investors covering margin calls and hedge funds clearing capital for redemptions. Hedge funds drive a tremendous amount of market volume and their investors are panicking right now.

Take advantage of the panic.

It might be a rough ride, but once the short term credit markets clear up the economy should lurch back out of negative growth, consumer confidence will increase. When will short term markets clear up? No one knows, there could be continued market nadir for an extended period. However, if you don't require cash right now don't attempt market timing. Ride it out, stomach the volatility in favor of long term value.

Personally, I'm sitting on a relatively sizable investment (well... in terms of my lowly assets) that I'll either invest mid-day tomorrow or on Tuesday. I'm going to cover with a PowerShares short ETF (Ticker:QID), but I'll stay net long. If you're afraid of potential downside, cover your positions, but don't exit the market.

This could be ugly for awhile, but panicking is the path to poor investing.   [more]

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