Buy Now Only If You Have A Minimum 3-5 Year Time Horizon For New Positions

THE FINAL NUMBERS - MANMADE PANIC

NEWS: Waking up to triggered circuit breakers was not my idea of a good way to begin my Friday, but that is the hand dealt, so I had to play. And no, my electricity was not out when I awoke at 5am. The stock market on the other hand was about to flip its breakers and halt trading at “limit down” until 9:30am when the markets opened. The situation caused a mass panic in the media that only escalated as the morning drew closer to the opening bell. At times, I had to turn off CNBC because it was either that or the TV was going out the window of my office. I understand they have to sell advertising and a flat market does not do that as well as a major panic, but they must begin to start thinking about the individual investor before causing mass hysteria. For one, it will keep my phone from ringing 24/7 - just kidding.

I am not alone in my thinking, the head of the NYSE was asked about this morning’s action by a CNBC reporter and to paraphrase, he said that maybe they (CNBC) should shut down for a few days so the NYSE and markets could get things in order without the media causing irresponsible panic. The gentleman could not have said it any better - congrats!

When the open finally came the Dow (^DJI) hit an early morning low of 8187, down 500 points from yesterday’s close. Throughout the day the index traded in a fairly tight range (all things considered) and with less than 20 minutes to go in trading was down less than 200 points. However a late-day selling program sent the market lower by 150 points in the last 5 minutes and the index closed off by 312 points or 3.6%. The S&P 500 (^GSPC) fell by 31 points or 3.4% and the NASDAQ (^IXIC)  lost 52 points or 3.2%.

Oil got hammered even after OPEC cut their monthly production and Gold finally put together a rally after trading below $700 in early morning trading for the first time in over a year.

THE BOTTOMLINE: The market experienced more volatility today as an overseas sell-off coupled with fears of a global recession swept the markets. Well at least that is what the media wants you to believe. I personally attribute the selling to more “forced selling” at hedge funds due to requests for redemptions. In simple terms, investors in hedge funds are panicking and would like their money back from the hedge fund and for that to take place the large funds must sell stock to generate the cash needed for redemptions. When this happens in waves it creates an overwhelming amount of sellers and virtually no buyers and therefore the end result is sharply lower prices.

The silver lining to this is that the “forced selling” is very near the end in my opinion. This can be seen in the volume today, which is well below yesterday’s rally and below the 50-day average. Another explanation for volume being down can be the simple fact there are not as many sellers left anymore and on the other side, buyers are not yet willing to step into the market. The good news is that as the sellers disappear it will build a floor in the market, but at the same time the upside is limited until buyers step back in.

When the market finally does turn a corner and confirm the bottom, there is a high probability that stocks rally with a vengeance because the hordes of cash on the sidelines will rush into the market. That is not exactly what I am looking for as a long-term investor, though it will give investors an opportunity to sell into strength and reassess the market. This is reason number one that I believe the market should not be sold at this time and “brave, patient, and long-term” investors can begin looking for stocks/ETFs to buy. BUT, the mindset for buying now must include patience and the investor has to have a minimum of a 3-5 year time horizon for any new positions. This is a must and I cannot say this any louder. If you are investing for 3-5 months you are taking a large amount of risk buying in this environment.

REASONS TO BELIEVE

NEWS: Even with the fear indicator hitting levels not seen since 1987, I was very calm and collected today as I watched the market like a hawk from the time I woke until the very second I am writing this. The CBOE Volatility Index VIX (^VIX) traded as high as 89.53 before closing at 79.13. So why was I not panicked like the masses?

THE BOTTOMLINE: I have come to grips with the volatile stock market environment we are currently in and will take that volatility and turn it in my favor. In other words, when there is blood in the streets as there was throughout the day for a number of stocks, it is time to take advantage of the irrational selling and take the other side of the trade and buy. If a stock you have wanted to own for months or years is getting crushed recently and you still believe in the initial reasoning behind owning it, why not begin to build a position now? Granted, I have no idea if this is the absolute bottom, however I do truly believe we are very near if not at the lows for a handful of stocks that could easily double in the coming years.

I was asked by a newsletter subscriber today this question: “Am I better off buying or selling stocks today?” My answer without even taking a breath was, buying! The best answer would probably be neither, sit back and let the market continue to bottom and then begin buying. But if I had to choose A or B, buying is the winner a thousand times over. However, if you ask the average individual investor, their answer would likely be - sell.

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