By Ted Olshansky
Publish Date: March 31, 2008
For the first quarter of the year, the Dow is down about 8% and the S&P 500 about 10.5%. The news is negative and the public is afraid of the market. This year, billions of dollars have come out of hedge funds and mutual funds. The question is will the people be right.
For now the edge is with them. We are no doubt in a recession and it is yet to be determined how long and severe it will be. The housing crisis/sub prime issue is far from being resolved and will no doubt have a widespread effect on the economy. Until these issues are resolved with some degree of transparency, investors will stay cautious.
This doesn’t mean the market won’t go up. The market will anticipate about six months ahead. So if there is light at the end of the tunnel we could see a substantial rise in the averages. If the housing crisis and recession prove to be worse than predicted, we could see another 10% drop in the market.
This writer believes the former (a rise in the market) more likely. Remember, people are generally most bearish at the bottom and most bullish at the top. Why? Because they are reading and reacting to the news of the day. They are not focusing on how things will be six months forward.
Don’t panic. The upside from here seems much greater than the downside.
Q: "In your opinion, what is the most important rule when trading options?" H Kolter, California
A: Without doubt, you must establish a long position when the market is declining and a short position when the market is rising.