Posted by Davy on November 21st, 2007 in Market Commentary
Email Davy

If you had been paying attention to financial news media back in August (hopefully many of you are not as foolish as I am), you would have heard many experts calling for an official stock market “correction” (a drop of 10%). These “experts” were saying that the markets hadn’t seen a correction for years and market players wouldn’t be able to take the market indices much higher from 14,000 without a correction. If you take a look at the market action back on Aug. 16, the valley of that month’s drop, the market dropped 10% from it’s all-time highs (using the Dow) and it was like all the traders said to themselves, “Well, now that that’s out of the way, let’s start buying!” Of course, there was also a Fed rate cut rumor making the rounds but the Dow literally went from down a few hundred to up 300 points within a few hours. The Fed cut the discount window the next day and we made our way back up to slightly higher new records on the Dow & S&P 500.

Fast forward a few months and the environment feels very different. The Fed has cut 75bp off the fed funds rate, the S&P 500 registered their first quarterly earnings drop YOY, the US dollar index has fallen into the land of no support and banks have written off billions. My feel for the market currently is that people aren’t waiting for an official “correction” to buy the dip and won’t view one as a buying opportunity. I would guess that if the indices break past the August lows, they will keep going further down. It feels like a very dangerous market and a dangerous time for the American economy. The bright spot for glass-half-full types may be

The talking heads are recommending “growth” stocks as opposed to “value” stocks (a silly distinction but that’s a topic for another time). If the market falls through that previous low, I’d prefer a floor based on actual fundamentals (book value, cash flow, dividends, etc) rather than projected future earnings.

Of course, intuition and “feels for the market” don’t pass muster as evidence so take it for whatever you think my gut feelings are worth. As always, YMMV.