Jamie Dlugosch

It Just Wasn't Good

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Jamie Dlugosch takes a look at the hottest topics to keep an eye on throughout the day.

Ending last week on a sour note was to be expected given the high degree of fear and angst. It was a horrible week for stocks and Friday was not going to change that. In fact I would say we were fortunate to avoid a 500 point debacle laced with a big increase in volatility.

Instead, economic data was benign and traders sent stocks only modestly lower. The Dow closed down over 100 points to finish at their lowest level since early October, 2002. I guess the last six years or so were just a dream.

The market did find some ballast late in the day as the government worked hard to convince investors that bank nationalization would not be happening. The administration supports a private banking system and that message was put out in force to anyone who would listen. Of course without any concrete evidence to that fact investors quickly retreated once again.

It could have been worse. Having broken key technical levels for the Dow, traders had every reason to sell and sell hard. They did not perhaps signaling that a breach of the lows may not be as bad as some are predicting. Ultimately it all depends on the economy and corporations ability to deliver profits. There the evidence, however small, suggests that things are stabilizing. The biggest clue one could have is to look at the credit markets.

In late September I wrote several articles for InvestorPlace suggesting that investors move quickly to the sidelines before things collapsed entirely. My basis for doing so was an analysis of the bond market. Traders there had a much deeper understanding of derivative securities that were at the heart of the crisis. When they priced securities as if the Apocalypse had occurred, I knew stocks were in big trouble. Today, the bond market is actually acting much more rationally than stocks. Once again, I would follow bond traders. Stocks are undervalued due to irrational fear and I believe we are near a rally even if for just the short term.