This is Panic

My Rational Voice of Reason

By Bryan Bottarelli
Thursday, August 16, 2007 1:26 PM EDT
Thu, 16 Aug 2007 17:26:00 GMT

Dear Bottarelli Research Member,

I’ve spent the morning speaking with my inner circle of traders — ranging from S&P futures traders to floor traders to technical analysts — and the conclusion is the same across the board: We’re witnessing panic selling.

INDU#2

By definition, panic selling is wide-scale selling of an investment that causes a sharp decline in price. In most instances, investors doing the selling just want to get out of any investment with little regard for the price at which they sell — and that’s exactly what we have today. When you see oil prices down $3.00, gold prices down $25, and the Dow off 325 points, it’s clear that investors are selling everything in reaction to emotion and fear rather than evaluating fundamentals. In fact, when you look at rock solid stocks like Southern Copper (PCU – NYSE) dropping $14.00 in one day, its’ very clear that the markets are irrational right now.

PCU

Also, major stock exchanges typically use trading curbs to restore some degree of normalcy to the market during times of panic selling, and that’s happening today as well. So let me take this moment to interject a rational voice of reason.

First and foremost, let’s not lose sight of the fact that the Dow just hit a historic high at 14,021 on July 17th. Exactly one calendar month later, the Dow is trading for 12,545, good for a 1,476 drop over 30-days time. Quick math shows that we’re talking about a 10% correction — well within the parameters of any longer-standing upside run.

Another important point: Markets always lose value faster than they gain value. For example, the Dow took 3 ½ months to gain 1,500 points (moving from 12,500 in mid-May to 14,000 in late July), yet it took only one month to lose these gains — with 1,000 of these points coming over the last six trading sessions! To my eye, this does not exhibit the characteristics of a new longer-term bear market trend — but rather we’re seeing a moment of panic selling within the parameters of a sustainable bull market.

Nevertheless, in times like this, its’ smart for us to push back from the table and see how today’s trading session plays itself out. I see no sense putting good money to work in an irrational market environment, so let’s simply watch today’s action and formulate a forward-looking strategy based on what we see today — and perhaps into tomorrow.

When we come out of this (and we will soon), I think the aftermath will offer us a series of phenomenal trading opportunities that’ll sustain our trading into the close of 2007. In fact, at the end of the 2007 calendar year, when we look back at this August 2007 shakeout, I think we’ll conclude that it presented us some of the most lucrative trades of the entire year — and I fully intend to take advantage of each and every one of them. So in a way, this fresh round of selling could actually end up being a good thing for traders like you and me.

But for the time being, let’s keep the powder keg dry by maintain a light trading ledger — and then look to fully capitalize on this irrational round of panic-induced selling when the timing is right. As always, you’ll be the first to know when this happens — so until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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