Recent Market Drops: Panic or Opportunity? Print
By Jude Santos & Wire Reports   
Saturday, 06 February 2010 07:59

According to a story in CNNMoney this weekend, investors are starting to get nervous again. And who can blame them?

The labor market in the U.S. is still anemic, the deficit is rising and people are worried about the possibility of higher taxes on banks and other businesses.

There are growing concerns about the financial health of many European nations and some fear that the breakneck growth in China could suddenly cool as people start using the dreaded B-word (bubble) to describe its stock market and economy.


Charts Tell Story Of Friday's Wild Ride

With all that in mind, a key measure of market volatility, the VIX, shot up more than 20% on Thursday and was flat Friday. This capped a wacky week on Wall Street in which stocks soared Monday and Tuesday and plummeted Thursday. But when the dust settled, the Dow and S&P 500 finished the week down less than 1% (the Dow managed to come back from triple digit declines on Friday to close above 10,000) and the VIX was up 6%.

"A sense of panic has returned. But I don't think it's anywhere near a meltdown like we had in late 2008 or early 2009," said Bob Phillips, co-founder of Spectrum Management Group of Raymond James & Associates, a money management firm in Indianapolis.

Phillips said he thinks that U.S. stocks, Treasury bonds and the dollar could benefit from this turmoil. That's because he believes investors will eventually take notice of the improving economic and corporate fundamentals here.

In other words, investors may flock to U.S. assets simply because problems in America are far less dire than in Europe. If that's the case, then the recent retreat in the prices of oil, gold and other dollar-denominated commodities may continue as the dollar strengthens.

Walter Gerasimowicz, chairman and CEO of Meditron Asset Management, shared that view.

"Let's not be totally pessimistic here. On the positive side, earnings have been quite strong and people are not paying attention to that," he said. "One has to stomach this volatility. But a recovery is underway."

The good news for our readers and subscribers has been the responsiveness to positive developments and the overall strength of the biotech stocks we've been following closely here on BioMedReports. Investors feel a sense of confidence in their investments when management is keeping them in the loop and up to date. Time and again, we've seen companies that "go silent" and its often worse thing they can do. Investors want to know what is happening with their money and they crave news.

Even as we've experienced two hundred point market drops, the majority of the stocks we've shined our lights on have held up or grown in value during the last couple of weeks. That should continue as the "undervalued" and "upcoming catalyst" messages continue to spread about many of the small and micro-cap companies whose CEO's we've spoken to in recent days.

As one analyst points out, "I doesn't matter what the chart or technicals look like. Stocks trade on emotion and price swings can be erratic by nature. News trumps everything."

This weekend's Washington Post reports that market watchers are looking for signs that the 7 percent slide on Wall Street since its recent Jan. 19 peak is more a correction than the start of another steep slump.

In other words, it's not time for investors to panic, yet. Rather, they should brace themselves for a long recovery of fits and starts.

"The thing is, unfortunately, everybody is so scared from the financial crisis. Anytime you see any type of downturn, they feel like the next shoe is going to drop. But it's not always another shoe," Bill Stone, chief investment strategist for PNC Wealth Managementm told the Times. "Anytime you get a pullback, people get nervous."

Some market analysts have been skeptical of the rally that lifted Wall Street more than 60 percent from its bottom last year, arguing that investors had sped ahead of the economic recovery and that a significant pullback would be necessary. The weak labor market at home and debt problems abroad could signal more challenges to the global recovery, they said.

"I think investors have learned their lesson from the credit crisis and are now taking evasive action much sooner than before," said Thomas Francis Nordby, market strategist for Lind-Waldock. "This is unfortunate for baby boomers. They simply cannot handle another wash on their retirement plans. Generation X will have yet another opportunity to invest at a discount, which could stunt the acceleration of this sell-off."

And this time, the downturn seems different. "This recent sell-off has a different feel to it," Nordby said. "It's much more global and political based."

On Friday, stocks erased big losses by the close following a three-session rout that had taken the market to its lowest point since last fall.

"There may be some late-day buying coming in because the market has sold off pretty dramatically over the last few days," said Haag Sherman, managing director at Salient Partners.

This market behavior, which has reasserted itself repeatedly since the financial crisis began, suggests that investment decisions are still being driven more by government support and liquidity concerns than market fundamentals.

The Dow whipsawed from down 170 points to closing up 10 points, thanks to a surge that started around 2 p.m. and really shot higher at 3 p.m. The Wall Street Journal wondered what market watchers made of it?

Strategist Robert Pavlik of Banyan Partners told the paper that buying began to pick up after the S&P 500 hit its intraday low around 1044 around 2 p.m. That level represented a 9% pullback from its recent high set in late January, close to the 10% threshold that traditionally defines a market correction.

“Once we got close to that 10% level, people started jumping the gun to get back in early,” in anticipation of a short-term market bottom, said Mr. Pavlik. “From there, it just built on itself as we went into the close.”

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