Drama in the Stock Market

The stock market, moved initially by the subprime housing crunch, and then pushed further by what increasingly looks like a lot of bad financial shenanigans on Wall Street (cloaked in the guise of "innovation"), has been a very scary place the last few weeks, particularly last week. It is as though what initially appeared to be a flesh wound has uncovered what might be a deep cancer in the financial system. We have lost a lot of value worldwide and in particular have come smack down to where we where at the March low.

The question now, as it always is, is whether to cut the losses, hold on for the long term, or buy this dip? This is the question for all investors and traders, and there is never any easy answer. It is precisely how one answers this question that determines one's success or lack thereof. Full disclaimer: my own personal experience has mostly been a lack thereof.

There are two highly emotional opinions on this this weekend, and one can cruise the Internet to find many who are screaming "buy" and many who are screaming "sell". My own personal opinion is the same as this author's: traders should buy now, but investors should sell into the next big rally. Traders should buy now because most technical indicators are screaming buy. Investors should sell because the underpinnings of this bull market have run out of steam. India is reaching the limits of its ability to expand because of creaking infrastructure. The American consumer is played out. Who's going to buy all that junk from China and Japan? The ever-increasing price of oil and food is hurting everyone's ability worldwide to buy things, no matter how much governments may choose to hide this ugly fact by referring to "core" inflation. Finally, and most importantly, the real fear isn't there in the market yet. Read the cited article for a longish list of more reasons.

Update: Having written the above, I discovered this terrific essay in The Economist on where we stand and why. This is must reading for anybody interested in this particular drama.

Update 2 (from Buddy Larsen): "Great one-stop explanation of the "panic of 2007".