The battlefield is a scene of constant chaos. The winner will be the one who controls that chaos, both his own and the enemies."
The simmering mess in the financial sector is exploding into chaos this morning as
files for Chapter 11 protection,
seeks safety in the hands of
Bank of America
and market players contemplate who will be next to go under.
The optimists have wanted to believe that the worst is over for banks and brokers, but the grim reality is that we still don't have any clarity as to the extent of the problems. The simple reason LEH couldn't find a buyer is that no one really knows how to value its assets.
I'm not going to go into all the issues weighing on the market. It is painfully clear that we are dealing with an unprecedented situation and it is likely to take a while before things become clearer.
The big question for us to consider is 'how do we deal with this'? This is as close to an outright crash as we are likely to see and how you deal with it depends on how you are positioned. I've been preaching caution and heavy cash holdings as the market down trended and if you are positioned that way then this action is likely to present great opportunity.
On the other hand, if you are heavily invested already, you are likely to have a sick feeling in the knot of your stomach.
And that brings us to the conundrum that this crisis presents. Is this the big purge that finally gets us to a market bottom or is it the start of a further breakdown that takes us to new lows and a further drip lower?
So far this year the smart move has always been to buy a panic open like this. We have consistently bounced back from this sort of selling and have actually ended up squeezing shorts pretty fast. You can be sure lots of folks are thinking it is going to happen again and are anxious to buy this open.
From a bigger perspective, this breakdown sets up the indices to make new lows for the year. A bounce off the weak open is eventually going to attract trapped bulls that are anxious to escaped the pain this market has dished out. If you are already heavily invested you may be well served to dump some positions into a bounce.
If you are not heavily exposed to this market, you may want to look for some buying opportunities to nibble this morning. This is panicky action and some good stocks that are suffering from the issues infecting financials are going to suffer some emotional selling. Look at sectors such as health care, biotechnology, consumer durables and maybe even some technology.
I've been steadfast in my approach that individual investors should stand aside as this market trends down and don't try to anticipate a bottom. This morning shows why. If you have cash this crisis is what will give you great opportunities.
You don't want to plunge in recklessly, but you should be considering some moves. The market still has a long ways to go before it bottoms and starts to uptrend but action like this is what will help get us there faster.
James "Rev Shark" DePorre is the author of
Invest Like a Shark: How a Deaf Guy with No Job and Limited Capital made a Fortune Investing in the Stock Market
. He is founder and CEO of Shark Asset Management, an investment management firm, and he also operates
sharkinvesting.com, an interactive online community that serves and educates active investors. DePorre holds business and law degrees from the University of Michigan, is a member of the Michigan Bar Association and a former tax attorney and CPA. He lives in Anna Maria Island, Fla., with his wife and two children. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Rev Shark appreciates your feedback;