Tuesday morning started just like all of the rest of them: the cat woke me up, my wife had taken all of the covers and the kids were carrying on and getting ready for school. But after tuning into to CNBC in those early morning hours, one thing was perfectly clear – this wasn’t going to be an ordinary day for the markets. Dow futures were down over 80 points.
A little-followed Chinese market had fallen nearly 10% and the wave it unleashed was circling the globe, now crashing at Wall and Broad. An especially lame manufacturing report released about an hour later only upped the ante.
In short, after a calm, flat sea a scant 12 hours earlier, the U.S. markets woke up that morning to the sounds of epic waves pounding its shores. It was gnarly.
What followed at the bell was nothing short of jaw dropping, as the water went blood-red right from the start. The herd was headed for the exits, and it was wasting no time trying to get there.
In fact, the sell volume was so strong that it managed to overwhelm the system entirely, creating a backlog of data. And by 3 o’clock, when that data began to clear, the glitch managed to drop the Dow an eye-popping 200 points in a blink.
That unprecedented swoon not only brought out howls around the office but apparently also sparked some further panic selling, which in turn caused another logjam at the NYSE and other markets amid a high volume of trades. A veritable frenzy was taking place.
After was all said and done, the Dow had fallen by 416 points, the S&P by 50.33 and the NASDAQ got hammered to the tune of 96.65 points.
So in the end, what really happened?
Looking back it was pretty simple. Amid all the endless talk by analyst after analyst about the need for a correction, we finally got one. And it came courtesy of the self-fulfilling prophecy.
Add to that the brewing worries about the sub-prime contagion, a falling housing market and decelerating corporate profits, and the stage for the correction was set.
All the markets needed at that point was a reason to sell off, and when Alan Greenspan let it be known that a recession was brewing, it set off the chain of events that led to the big decline.
The herd wanted a correction, was looking for a correction, and on Tuesday it had decided en masse that the correction had begun. After all, the Maestro himself said so.
Call it “Irrational Exuberance,” Part 2.
Just like his famous comments in 1996 that sent the markets into a freefall the next day, Greenspan’s recession call on Monday proved once again that when the former Fed chairman speaks, the markets listen.
Even from the lecture tour, Greenspan can still pull the strings.
But as bad as the day was, it’s important to keep it all in perspective. In truth, it was miniscule compared to what historians have identified as crashes. The crash on October 19, 1987, took the stock market down 22.9 percent, while the 1929 crash included a 12.8 percent fall on October 28.
Tuesday’s events were nothing compared to those.
In fact, the move was very similar the “irrational exuberance”-inspired decline. Markets at that time staged a 3% one-day drop and fell even further to a 7% overall correction.
Similarly, the Asian flu caused an even bigger decline in 1997 as the Dow dropped 7% in one day, twice as far as what happened on Tuesday.
And history has shown the markets only went higher following those earlier big declines. In fact, in the years that followed those downside moves, the markets pushed on to all-time highs.
So while the huge selloff was hard to swallow, it does offer the chance to buy stocks much more cheaply in the short run. That’s why now is exactly the time to begin shopping for stocks at a discount, because although the markets did manage to calm down the next day, one thing is certain – they will fall still further.
Tuesday’s move was simply too strong to be ignored. It was an earthquake and there will be aftershocks, regardless of chairman Bernanke’s statements yesterday.
The real Fed Chairman may have talked the markets off of the ledge on Wednesday, but in truth, what Tuesday proved was that there was a strong layer of latent fear lurking beneath the surface of the bull run. If you doubt that just take a look at the action on the CBOE VOLATILITY INDEX (^VIX).
But as a relative measure of fear, the VIX also serves as a window into opportunity. After all, making money in these markets takes the ability to buy in the face of that very same fear.
In fact, while watching the carnage unfold on Tuesday, I was busy looking for bargains in between the howls. And by day’s end I had managed to find several great stocks that have suddenly made my watch list.
I’ll be bringing some of them to you over the next few weeks and looking for spots to test those very waters. After all, Tuesday was no ordinary day – amid the selloff a new opportunity to profit was also born.
Wishing you happiness, health, and wealth,
Steve Christ, Editor