The Bleeding Continues

Posted by Ray on October 7, 2008 under Main | Be the First to Comment

We saw a very orderly sell off over the past two days with little indication that it is done. While we were wrong about a huge one day sell off, it has taken a few days now, it stands to reason that things will get even stickier in the near future.

The first warning sign was that the passage of the bailout package sent the markets down 150 points when it was up over 250, a 400 point reversal. Of course, the sell off continued on Monday with a spectacular rally at the end of the trading day. This was short lived as it was very evident that the sell off would pick up steam in the near future, which it did today.

As of right now we suspect that the opening bell will be a literal blood bath for investors. The Asian markets are down 3 to 5% tonight on top of already steep declines over the last few days. In Europe we expect to see further market declines as the banking sector is in question at the moment. With firms such as RBC under the microscope if there is the slightest feeling of a further problem then it will surely be a steep correction.

The major warning signs right now is the fact that the Fed is buying commercial paper and that did not strengthen the credit markets. Australia lowered rates 1% and that did not stop the sell off. The Asian markets continue their slump and the banking issue in Europe is just now heating up. The dollar has been a yo-yo over the past few days, but any strength in the dollar is not a vote of confidence it is merely the sign that it may be slightly better off then other currencies.

The real test will be at the end of the week when we are facing a 3 day banking holiday and there seems to be little reason to hold securities over the weekend, the risk is too great. This may lead to a dramatic sell off. Next week will be very interesting as it is options expiration week which will lead to massive volatility.

We continue to recommend a large cash position to anyone who is interested. We made this call last week, but few paid attention to what we had to say. If you think the last few days were ugly then you will be unpleasantly shocked by what could happen in the days to come.