Panic hit with a vengeance last week and pored over to this morning. Don Hayes, who created the ARMS index, which measures extremes in the market both on the oversold side and the overbought side, said that the NASDAQ went over 7 on the oversold (the highest being 10). This is way over done. The reason I am focusing on the NASDAQ is that it takes out the big oil and large banks and gives you a more reliable indicator of overall action. No, I did not expect 11% declines; in fact, I have found no one in my profession did either. What really caused this was machines which are programmed to sell based on set parameters that do not take into their objective fundamental facts.
There is now 8.3 trillion dollars on the sideline; I have never seen true bear markets occur with as much liquidity as we have this morning. If you go back to the bottom of 2008 with the market in the same conditions as we have now, over the next two years you made a bundle. All of the great investors like a Warren Buffet follow a “when others get fearful, it is time for smart investors to get greedy.”
The market is producing an environment that Politicians fear: voters hate everybody. Maybe this will light the fire to get meaningful Tax Reform and major reform to those entitlement programs that Politicians have not been willing to reform for years. The stock market is a powerful incentive due to the fact that it is a real reflection of the feelings of voters. Either Washington will listen and act or find another job.
We are in what I call “cowboy up “time, a time when investors have to tighten up the cinch, pull your hat down a little tighter and resist the panic of the Herd. It is a personality trait that all good investors learn over the years, but it never gets much easier it seems. Every time there is a new threat trying to knock over those valuable disciplines of the past. But history tells us to stay the course, and continue to rely on the instrument panel. These storms do die down, your patience and fortitude will be rewarded.