A firestorm raged through the market yesterday, burning those investors that failed to heed a number of early warning signals. As with any bad storm, the first thing you want to do is seek shelter; the second is to check for damages; and the third is to figure out what do next. Hopefully you've already done the former, so let's begin by assessing the damage and conclude with an answer to the question "what now?"
One look at the list below and you can see that the damage inflicted on the market was extensive.
In sum, the picture painted above is one heck of a lot scarier than the "Blair Witch Project." Of course, it also cost a lot more than $35,000 to make. But before you let the market's motion make you sick to your stomach, remember that unlike the young filmmakers, Wall Street favors the more traditional, Capra-like, happy ending. And one look at recent market history suggests that Clarence might be on his way soon. (For those non-film buffs in the audience, that was a reference to one of the greatest films ever made, Frank Capra's "It's A Wonderful Life," in which a guardian angel by the name of Clarence saves the lead character - played brilliantly by Jimmy Stewart)
What makes me think that this story could end happily? Over the past five years, each time the major market indices have tested their 200-day moving averages, they have staged dramatic recovery rallies. The rebounds usually commence within weeks of the initial test, and result in the indices being sharply higher one- and three-months later.
Will this trend continue? I don't know. There are three factors which are different this time around. They are:
Of these three, the first carries the most weight. It also might be the easiest hurdle to clear. One positive to the equity market's fragile condition is that it reduces the likelihood of a Fed rate hike in October. And given the uncertainties associated with the Y2K bug, if the Fed doesn't raise rates in October it is unlikely to do so for the remainder of the year. Once investors sense that the Fed policy is on hold (for at least the next several months), long-term interest rates might finally slide below 6.0% and stay there. Relief on the rate front would, in turn, ease the downward pressure on equities.
Based on the yesterday's major breakdown, and the market's proclivity for falling faster than rising, the next couple of days/weeks are likely to be ugly. But at least there is a light at the end of the tunnel. Let's just hope it's not a freight train.