@theMarket: We've put in a Bottom — Buy Stocks on Pullbacks
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That's not to say there won't be a pull back. After an upside move like we've had over the last two days, the markets will likely consolidate. Buy that and any subsequent dips.
All the variables that I normally look for in identifying a bottom — volume, panic, pessimism, new lows, and market breadth — were satisfied over the course of the market's downturn this week. However, it is the rescue plan that is now being drafted by the federal government that has tipped me over to the side of the bulls.
Up until now, the Fed and Treasury have been acting like two firefighters working furiously to save three or four trees while the forest around them was burning to the ground. Now they're calling in air support.
The proposed plan would establish an entity reminiscent of the Resolution Trust, which was established in the aftermath of the savings and loan crises of the 1980s. That government-owned asset management company was charged with liquidating the bad real estate and mortgage loan assets it assumed from hundreds of bankrupt S&Ls.
Naturally the circumstances and sheer weight of today's financial system far exceeds anything we encountered in the '80s so there will be major differences. Nevertheless, it is an important first step in establishing a comprehensive approach. I believe it will work.
A second proposal would ensure that the nation's $3.4 trillion in money-market funds would be protected via a government insurance plan similar to the exiting FDIC guarantee. This proposal is in response to a run on money markets earlier in the week.
Panicky investors, spooked by the government's takeover of 80 percent of AIG Insurance, started pulling cash out of these usually safe haven funds fearing money markets were the next domino to fall. This proposal is also right on.
In addition, the SEC, following the action of its U.K. equivalent, temporarily banned short selling (selling stocks you don't own) on 799 financial companies. That initiative was partially responsible for the almost 10 percent move in the markets over the last two days.
I say partially because the markets were vastly oversold by Thursday when it reached a bottom at 1133 on the S&P 500. At that point, stretched like a rubber band, the index snapped back at breath-taking speed. Friday it closed at 1255, just a point lower than at the end of last week.
I fully expect the majority of investors to remain cautious and skeptical. The proposed plan will be met by opposition in some quarters because, after all, this is an election year. The Bears, who have a vested interest in the market continuing its downward trend, will pull it apart, point out every flaw and cry victory on every dip.
Ignore them. As an unapologetic contrarian, I say buy the dips, keep some cash to the side for opportunities and rest easy. We've come through another one.
Bill Schmick is a licensed investment adviser representative and portfolio strategist with Berkshire-based Dion Money Management, managing over $800 million for middle-class Americans from coast to coast. Direct your inquiries to Bill at 1-877-850-7942, Ext. 146 (toll free) or wschmick@dionmm.com. You can also visit www.afewdollarsmore.com for more of Bill’s insight.
