Thursday, May 6, 2010

Thursday, May 6, 2010 was one of the craziest days in the market, ever. The morning started with fluctuations in a somewhat larger than typical range of about 20 points on the S&P 500, or about 1.7%. Around 1:30 PM EDT the bottom fell out and the market fell 80 points (6.8%) in just over 1 hour, only to be followed by a rally into the close so the final loss for the day was 42 points or 3.6%. This is still a substantial loss for one day, but a lot better than the nearly 100 point loss at the low of the day.

If you had been watching TV, listening to the radio, or reading the newspaper on Friday you were aware of the speculation as to the cause(s) of this chaos. Included were:
computer glitches,
human error,
purposeful price manipulation,
riots in Greece,
the European Central Bank not supporting Greece,
Brown being overtaken by Cameron with a hung Parliament in England,
massive oil spills in the gulf of Mexico,
institutions using computer programmed buying and selling triggers,
or all of the above.

We may never know the real cause or why the measures that are supposedly in place to prevent such disasters, did not work.

While a one day move does not establish a trend it is useful to look at the net result along with the previous week or so. On April 23 the S&P 500 closed at 1217. Six of the next 9 trading days were down days with the close on May 6 at 1128. That's a drop of a little over 9% in 9 trading days.

Friday May 7 started with off a positive note with reaction to a favorable jobs report. The positive trend did not last long and the S&P 500 closed at 1111, down 17 points or 1.5%.

So what does mean going forward. The technical indicators I follow signaled that it is time to move from offense to defense. The signals came quicker than usual because of the large move, but they still triggered at the same places.

This means it is time to be cutting losses, protecting profits and pulling back to raise cash to be available for re-investment at the proper time.

For IRA accounts with individual equities or Exchange Traded Funds, stop orders were hit or adjusted. New investment recommendations are on hold until the market's directional signals are clear. Inverse funds that go up in value as the market goes down, are a viable choice if the downtrend continues.

Mutual Funds in IRAs and 401(k)s are being closely monitored for sell signals. Paring back or completely closing select funds will occur as they show weakness and evidence of violating support levels. If the market continues to move down, clients will hear from me, individually,with specific recommendations for their funds.

Its no fun watching the gains accumulated since early February evaporate in a few short days. It is a time like this when a "buy and hold" strategy can lead to losses of 50% or more. This is when proactive portfolio monitoring to limit losses and preserve capital will increase the likelihood of reaching investment goals.