It's been one heck of a two weeks. One would think the world was coming to an end, given the way global markets have behaved. You may not be able to make much sense of why markets sold off so quickly, but out of the carnage we may be able to predict what comes next. Here's why.

Stock market free falls, such as the one we are presently experiencing, are called "waterfall declines," which are sudden drops of 20 percent or more compressed into a few short weeks or days. They are fairly rare events and most follow a roughly similar pattern consisting of three phases.

The first phase is the decline itself followed by a sharp bounce higher. We may be experiencing that bounce right now. Following the bounce (and possible re-test of the lows), the market should drift into a basing period that could last for one to three months.

During that time the market could move up and down in a sideways pattern similar to what we experienced in May through June of this year. Finally in the last phase there is a rally lasting six to 12 months that could move the markets higher by about 25 percent.

In reviewing 10 waterfall declines from 1929 thorough 2002, three months after the post-waterfall low, the stock market was higher in all 10 cases. Six months later, the market was higher in nine of the 10 cases with the average gain at 17 percent. A year later, the market was higher in nine out of 10 cases with the average gain equal to 24 percent. The financial crisis of 2008-2009 was in a league all by itself. The market, three months after the low of March 2009, was up 37 percent.

If we drill down even further, say to the next two weeks, one can expect a "relief rally" of as much as 10 percent. Then, if the pattern holds, we should "re-test" the bottom. In this case, if we have truly found a bottom for the S&P 500 Index at around 1,100, we should bounce again from there.

"So what happens if we break down through that 1,100 level?" asked a nervous client from Manhattan.

The short answer is 1,100 wasn't the bottom and we go lower, by as much as 10 percent, to S&P 1,000.

Waterfall declines are often recession-related. There have been exceptions to that rule, for example, in 1987 the market fell sharply for two days only to spring back. The Dot-Com boom and bust of 2002 was another waterfall decline that did not usher in a recession.

So what is the best way to navigate through a waterfall decline and its aftermath? It is obvious that one should ride out the turbulence; at least for the next few months. If we are truly entering into a recession, the economic data will confirm that fear or dispel it. If we are going into a double-dip, then I advise you to get defensive—bonds, dividend paying stocks, etc.

But it may turn out that the market was simply correcting, as it does periodically after a long and profitable run. Remember, the S&P 500 Index was up over 80 percent in over two years, so a 20 percent pullback doesn't look as serious from that perspective. 

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.

Unless you have been living in a vacuum, you are keenly aware of the stock market's freefall. Panic is in the air and rumors are swirling around the Street's trading floors. It is time for investors to step back and take a breath.

If you are worrying about your retirement accounts, don't. This is not 2008-2009. Much of what is going on in the markets is a result of conjecture, not facts. No one knows if we are going into another recession. No one knows if Italy is going to go bankrupt, no one knows the future. At most, we can only make educated guesses.

Let me first admit that I was definitely wrong last week when I posed the question "Buy or Sell" in my column. I advised readers to hold onto their investments. Like many others, I was expecting a rally in stocks after the successful passage of a debt-limit increase. Even though I expressed my deep concerns over the weakening of the economy, I was caught like everyone else going the wrong way when the markets dropped through the floor. That said, I believe it is too late to sell and, if I do, I will wait first for a bounce.

Selling a market already down 12 percent in 10 out of 11 days is not a smart move. We are close to, if not already in, that zone of capitulation where panic takes over and investors want out at any price. Thursday was over a 95/5 day during which 95 stocks were sold for every five purchased. The New York Stock Exchange Index is so oversold that it registers a minus-2 standard deviation (SD). These are all signs of a near-term bottom.

My friend John Roque, technical strategist over at WJP Capital Group, indicates that when stocks are this oversold, a relief rally is not far behind. In 100 percent of the cases over the last 30 years where a minus-2 SD occurred, the markets have bounced anywhere from 2 percent to over 10 percent within two weeks. Three months later, the same markets gained 3.6 percent to 34 percent. So the odds are in your favor that selling now would be a losing proposition.

"OK, I wait for a bounce," says a client from Becket, "then what?"

That depends. Many times after a relief rally (sometimes called a dead cat bounce) the markets return to, at, or near the lows before moving higher. At other times, there is a week or two of pause before markets resume an upward climb. Last year, the S&P 500 Index lost almost 18 percent and then rallied straight up with no retest. It could happen again but we will need to get the bounce first before guessing at its durability.

The reason this correction feels so different from last year's is the compressed nature of the decline. What took four months to accomplish in 2010 has taken only 11 days thus far this year. In some ways, a short sharp correction is better than a drawn out death by a thousand cuts kind of correction, although both are painful.

So here's my game plan: stay invested, wait for the bounce, when it occurs sell some of your most aggressive investments and see what happens. If we retrace, buy at or close to the bottom. If we continue to climb, the worst that can happen is you miss a few percentage points of gains. But remember, preserving principle is your No. 1 concern. Profits should come second. 

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.

It has been over a year since investors experienced the kind of sell-off that has beset the global stock markets this week. As of Thursday, most indexes have lost 10 percent or more. The jury is split on whether we are at the bottom or have more to go.

Most of the losses have occurred quickly, in around 8-9 days, which although painful, could be a blessing in disguise. Sharp, short corrections, in my opinion, are much better than corrections that drag on for months losing a little each day.

Of course, these large declines often trigger strong emotional reactions among investors but decisions based on panic rarely prove to be the right ones in hindsight. So I thought I would provide a little perspective on why the markets are selling off and whether or not you want to join the ranks of sellers.

Over the last few months, the macroeconomic data began to weaken. At first, economists explained that it was caused by bad weather, then the Japan earthquake, but as the numbers continued to come in at a less-than-expected rates investors grew increasingly nervous. Then last week, while all eyes were focused on the debt ceiling crisis, the Commerce Department announced that second quarter GDP came up short — 1.3 percent versus 1.7 percent expected. Even worse, the first quarter was revised downward to just 0.04 percent, a shockingly dismal performance.

That number, combined with an unemployment rate above 9 percent, plus continued uncertainty within the poorer countries of the EU, was enough to tip the scales. The trading range that the markets have been locked in since the end of April was finally resolved to the downside. Since then, we have broken several technical supports and are hovering just above a big one at 1,225 on the S&P 500 Index. If it breaks down and through this level, the chances of additional losses are quite high.

Sounds like doomsday, doesn't it? Well, the same thing happened last year for the same reasons. The economy was slowing, unemployment rising, Europe was in trouble and the markets dropped 16 percent from April 2010 through August. It was then that the Federal Reserve Bank announced the possibility of QE II. The markets reversed, exploded upward and investors never looked back.

Since March 2009 we have had seven such "dips." Each pullback was considered a buying opportunity and those investors that did so have been mightily rewarded. No one knows if this will be No. 8 or if we are going to continue lower. At some level, stock prices will become just too cheap for value buyers to remain on the sidelines. Some say we are at that level now.   

My advice is to decide how much you are willing to lose and when you reach that limit sell and move to the sidelines. For some investors that can mean 5 percent (you should already be out), others will accept 10 percent, while some might be willing to sustain even more. Once your limit is reached don't hesitate. Be prepared emotionally for the possibility that the markets could turn around a day after you sell out. Accept that if it happens, and don't beat yourself up for not staying the course.

For those of you who have bond investments, keep them since bonds and gold are benefiting from the stock selloff.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.

All week the markets have hung on every word coming out of Washington. Nothing else has mattered: not earnings, not Europe's problems, not even the second coming of Christ could have distracted investors. Now that both political parties have achieved what they wanted, let's please stop the monkey business before it's too late.

Credit Suisse, a global broker/investment banker, said on Thursday that in the unlikely event that the U.S. defaults on its debt, the economy could contract by 5 percent and the stock market could lose one third of its value. Although I believe that is an extreme view, the entire mess over the debt ceiling is causing hesitation and delay among the nation's business sector.

Companies have put all sorts of decisions on hold until the crisis is resolved. That includes hiring and investment decisions that directly impact the employment rate and our economic growth. The timing couldn't be worse. The economy is just starting to recover from a soft patch caused by the slowdown in Japan's economy. In addition, our unemployment rate has recently notched up to 9.2 percent. We can't afford these shenanigans.

However, the increase in our debt ceiling is only one of an emerging two-part problem in our economy. Credit agencies are warning that unless we do something to reduce spending and the deficit, our credit rating may be reduced. Now that wouldn't be the end of the world for America, after all, Japan's credit rating was reduced early this year with little consequence. But it certainly wouldn't help the pace of our recovery nor improve the jobless rate.

As we go down to the wire, it appears that if there is to be a deal on raising the debt limit, then both parties will need to agree to disagree and postpone a big deficit-cutting plan until after Aug. 3. There is simply not enough time to hammer out a compromise in the time allotted. There will be a price to pay for a deal of that sort. The markets and the country's corporations will continue to hesitate until a deal is struck that will satisfy the credit agencies.

A compromise budget-cutting plan that cuts $2 trillion or so from the deficit over 10 years will not cut the mustard. The agencies are on record as wanting at least double that amount in order to stave off a credit reduction. The Democrats, led by President Obama, wanted a "Grand Plan" that would answer the demands of the credit agencies and put to rest the deficit politically as an election issue.

The Republicans want the opposite. They see the economy, the deficit and unemployment as the three most likely opportunities to unseat the Democrats next year. By foot dragging now, they can keep the controversy alive and hopefully capitalize on an anemic and aging recovery while continuing to ask "Where are the jobs?" If in the process either the country defaults or our credit rating is reduced they are betting Obama will be blamed for that along with the economy.

They are counting on voters to forget by election time who did what to whom in this debt controversy. I suspect their gamble will pay off.

After all, how many voters remember that the TARP Plan (just one example) was approved before Obama took office? Did you know that the huge deficit we are saddled with actually occurred during the Bush administration? Between his tax cuts and the initiation of two wars, President Bush, with the aid of today's Republican leadership, not only spent the surplus garnered under the Clinton years but wracked up $8.813 trillion in additional new debt.

The Democrats under Obama have added $1.136 trillion in the form of economic stimulus and tax cuts. Economists argue that without that spending our country would have remained in recession or possibly fallen into a depression. In addition, Obama will spend $152 billion on health-care reform and $278 billion on defense. The vast majority of the money spent on these policy initiatives won't even be spent until years in the future, if at all.

As an independent voter, I am less inclined to listen to either parties' rhetoric and instead focus on the facts. The facts are that the financial crisis, the deficit and the subsequent rise in the unemployment rate are the legacy of the Bush administration. I can applaud the GOP for belatedly realizing that they have been on a spending spree for the last decade, but don't blame others for your party's failings.

Sure, if you choose, you can blame Obama and his team for failing to generate a quick recovery, but enough already with this myth that he is the root cause of today's problems in America. As Americans, we deserve more from Washington. 

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.

On Friday, the European Union announced a new $157 billion bailout plan for Greece. The scope of the plan went much further than most investors expected. It promised to finance all countries that need bailouts for as long as it takes for them to recover. There's more.

I refer to the new plan as the "Full Monty" (see my column "Europe Goes the Full Monty") because it is the first time in the 18-month long crisis that European leaders were willing to draft a comprehensive approach to the financial crisis among the PIGS (Portugal, Ireland, Greece and Spain).  The plan will be proactive in heading off any further financial contagion among its members while fencing in those that already are in trouble (Portugal, Ireland and Greece).

The deal does allow for a "selective default" in Greece, where some but not all of its debt will be written off or renegotiated at lower terms and lengthened maturities. The plan does not go as far as I might have wished but in the real world of European politics it appears the best that they could do. In my opinion, the crisis appears, if not over, to be at least contained for now.

That crisis is one of two large clouds that have been hanging over the markets for months. The other bailout issue is in our own backyard. And, as I suspected, our elected representatives are stretching out the tension as long as they can. Both sides are glorying in their extra media attention, using their 10-15 seconds of sound-bite glory to appear concerned, tough and "on your side" (while raising as much additional campaign funds as possible for next year's elections).

Here are a summary of client questions and my answers this week on this on-going travesty:

"Will the debt ceiling be raised by the August 2 deadline?”

I'm betting yes, but that still leaves 11 days of volatility in the bond and stock markets.

"What will happen after the deadline, if the ceiling isn't raised?"

As I wrote last week, the markets will decline in the short term, presenting a buying opportunity for anyone brave enough to venture into equities.

"Will the Gang of Six deficit-reduction plan be passed?"

I suspect some version of that plan will be passed but the question is when. The Republicans want to prevent any legislation that might improve the economy or reduce unemployment until after next year's elections. They hope voter frustration over the economy will propel their party's candidates into office and defeat a re-election bid by President Obama.

Unfortunately, the nation's financial credit agencies are not cooperating with the GOP timetable. They have made it clear that without a serious, comprehensive deficit–cutting plan in the ballpark of $4 trillion or more, they will cut the U.S. debt rating. I suspect we will be on "credit watch" until a deficit reduction deal is passed, which means that we will be assaulted by this back-and-forth bickering for some time to come.

"If and when the deficit plan is passed, can we go back to whatever normal is?”

That depends. I believe that cutting spending and raising taxes in an economy that is struggling to gain momentum exposes this recovery to extreme danger. Cutting spending too deeply while raising taxes too much (and shrinking the money supply) is exactly what nipped a fledgling recovery in the bud and sent the U.S. economy into a depression in the '30s. Ask yourself this question: do you feel confident that a bunch of madmen in Washington have the ability to strike just the right balance in order to grow the economy while reducing the deficit?

But let me worry about that. It will take weeks, if not months, for such a compromise to be worked out. In the meantime, this last storm cloud appears to be moving to the edge of the horizon for now. I expect some real progress on a compromise next week.

The economy may be inching along, but corporate profits are booming. This earnings season so far is seeing the vast majority of companies beat earnings and increase guidance. This debt crisis is repressing what should be a buoyant stock market. Like a coiled spring, stocks are just waiting to bounce higher. If and when the debt ceiling is passed, that will happen.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.