Tuesday, February 27, 2007

DOW Sheds 500

Is this finally the end of the Goldilocks Economy that all of us pessimists (aka realists) have been predicting? The Dow Jones Industrial Average fell over 500 points at one point during today's trading session. Fear poured over from the Chinese stock market which fell in excess of 8% during last night's trading. Durable good numbers came in this morning at -8% while analysts were predicting only a 3% fall. And to top it off, geopolitical concerns increased as a Taliban suicide bomber failed in his Dick Cheney assassination attempt. All this created the largest single day drop in 6 years.

Slower growth, geopolitical concerns... just as predicted.

Here's a look at how my Bear picks performed today during the stock market crash:

DOG: +3.27%
DXD: +6.10%
FHI: -0.73%
USO: -1.63%
BEARX: +2.53%
PBW: -5.78% (but up 20% in the last month!)

Not too bad. I hold 4 of these 6 in my cautious portfolio, but my equity exposure is still around 70%. While this was an ugly day for the Bulls, I don't expect this kind of volatility to be the norm. I truly believe the markets are in equilibrium with chances of a recession at 50/50 - no crash, no Bull mania. Don't panic!


***UPDATE***
It turns out that Dow Jones admitted to a "calculation error" around 2:00 EST Tuesday that artificially created a 200-point drop in the Industrial Average in a 60-second period. Thus, the DOW was not actually down as much as 540 points like it appeared. Their trading system had difficulties handling the massive sell orders that occurred in such a short span.

Even though this was an artificial drop, it caused a real panic that caused the markets to sell off even more (in my opinion). So the artificial drop became a real drop when perception became reality.

The markets did recover on Wednesday, but sank 200 more points on Thursday & Friday.

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