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Another day, another (almost) 10%

December 1st, 2008 Leave a comment Go to comments

The S&P500 is down about 9% today. About this time last year that would have shocked me. However given the volatility we’ve seen since October, I’m barely phased by today’s performance. Coming out of graduate school I thought market participants were generally rational and market movements like this usually have a good explanation. These days I’m not so confident of that.

Let’s see, what has transpired over the Thanksgiving long weekend that could cause such a fall? We had a five-day rally in the markets leading up to Thanksgiving (including the day after the holiday). This in itself is great since we haven’t been able to have a sustained rally for a while now (this suggests to me that a bottom is near – more on this later). Going into this five-day rally investor sentiment about the consumer and their ability to shop was grim. Then today some numbers come out saying that consumer spending over the Black Friday weekend was not spectacular, but was above expectations. So, doesn’t that mean that markets should move up due to the (sort of) good news? Rather, investors feel more down about consumer spending. There was no information today to suggest that spending will be any lower than was expected last week, yet there is still a sell-off.

I think a good part of today’s action was profit-taking from last week. Investors see a five-day rally amidst the backdrop of a recession and so they cash out. But that certainly shouldn’t cause a 9% drop. Yet I see no other rational explanation for it. Go figure…

Though steep and sudden losses have become a bit of the norm, take a step back and imagine 10% of your net worth (well, most of us aren’t fully invested in equities, so let’s say 10% of your investment portfolio) going up in smoke in a single day!! Imagine the things you could have done if you had that in cash! These are scary times, people – be afraid (of the volatility that is; the price level, on the other hand, is something to be excited about)…

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