Ted Olshansky began his investment career in 1968 as a registered broker with Dean Witter & Co., Inc. Mr. Olshansky was a market maker and member of the Chicago Board Options Exchange (CBOE) from 1975 to...
Publish Date: February 27, 2007
Ted Olshansky
In my February newsletter we discussed the reasons why I believed the January 24th close of around 12,600 was a likely top for the short term. The reasons were excessive complacency, an overbought market, the fact that we had not had even a 2% correction in eight months and that 62% of investment advisors were bullish.
Today’s February 27th sell-off of over 400 points eliminated these overhanging concerns. This decline, long overdue was precipitated by an overweighed decline of 9% in the Chinese market, disappointment in the durable goods report and concerns about the sub-prime mortgage. Further exacerbating the losses were nervous sellers sitting on large profits and massive selling of exchange traded funds (no up tick needed) by professional traders trying to get short.
But really, did anything change? Did the Fed announce an increase in rate hikes? Did anyone mention a liquidity crisis? Did anyone mention scandals? The answer is no.
The decline seems to be more an emotional reaction to a host of items. Generally decisions made emotionally are wrong. Those who panic and sell usually regret it a few months later.
So where do we go from here? To get an idea, let’s take a look at how the market reacted after a few sharp sell-offs:
1. 1963: Assassination of JFK – Markets were substantially higher within two weeks.
2. 1987: 508 point decline (about 18%) – Substantial rally beginning the next day.
3. 1989: Sharp sell-off in the last hour of trading due to a collapse in an important merger – Substantial rally the next day.
4. 2007: 415 point decline – Rally after a few attempts to take the market lower. (The writers prediction)
Since the decline does not seem to be due to fundamental economic changes in the economy, we should be willing to add positions or enter the market at the reduced prices. This should be done bit-by-bit as we do not want to be picking the exact bottom, but rather invest in a dollar cost averaging manner.
Q: When buying a stock and protecting it with a put, if the stock rises does the gain become long term for tax purposes? Norman Enright San Francisco, California
A: No. The IRS says you were not at risk and the gain will be treated as ordinary income no matter how long you hold the stock.
Bullish Bearish Number: 70%
Thought for the Month: Keep your head on when everyone else is losing theirs.
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