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In my last post, I wrote about taking a calculated risk to the long side. But I wrote this as well: "I also think there continues to be the risk of a major dislocation in stocks (read: crash)."
I don't mean to sound alarmist, but I think the risk of a crash has increased. The market's reaction to the bailout bill was certainly not encouraging. More importantly, the credit markets have not improved. The situation is serious, and even though I have been expecting some themes to play out intellectually (bear market, deflation, etc.), it's quite different to see them up close. We should all be prepared to lose money in the market, and we should all ask ourselves: What if the government's interventions don't work?
Of course, something like a crash would be a "black swan" type event, rare by definition. However, we have seen events in the past few weeks that I'm sure we never thought we'd see. These are all rare events.
Perhaps buyers of stocks now will cash in on a great trade next week or next month or next year. In oversold conditions, the odds sometimes point that way. The government will do everything it can to try to calm the crisis (perhaps a surprise interest rate cut?). But after trying to get bullish for a trade, I just don't like what I'm seeing. I will use any bounce to lighten up my already limited risk. One of the benefits of being an individual investor is that I can change my mind and my portfolio very quickly. And I will take trading opportunities as they present themselves. But this is no time to be a buy and holder.
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