The markets have declined by about 10%, and many specific stocks have been harder hit. How should we view this?

The decline, sparked by concerns about subprime mortgages, has been breathtakingly swift. For traders accustomed to a trading range and gentle pullbacks, it evokes comments like “crash” and “bubble.” Those saying this should go back and look at charts from the 1987 crash and the 2000 bubble.

Who is Dumb?
In the current market, anyone who bought anything on the way down is dumb. Fading the market declines has worked for years, but not this month! Count us among them, since we have done some gentle buying on a wide scale. So far, any buy has been wrong, without regard to the normal fundamental valuation of the stock.

It happens. We do not think such moves are predictable. There is always someone who called the top and we call that Fooled by Randomness. Many more pundits have been predicting the current decline for several years from much lower market levels). They are now accepting congratulations. Wow!

Reviewing Our Perspective
As a reminder to readers, we are not offering trading advice; our purpose is an educational look at what we are actually doing.

In recent articles we have tried to illustrate several points:

Current trading is dominated by hedge fund liquidation. The right posture varies by time frame. Most individual investors cannot guess or time the kind of action we are seeing now.
Our intermediate trading model turned neutral as we reported on August 1st., and negative a couple of days later.
Not everyone can trade so aggressively, nor should they. Each person must decide on a time frame and a strategy, and then stick to it.

Conclusion
Calling the bottom of a sell off is dangerous. We have tried to highlight the difficulty in predicting any unlikely event. Bottom calling certainly qualifies.

With this qualification in mind, we see plenty of stocks trading at prices that do not reflect the fundamentals. These include companies that we have written about before like the following:

Apple Computer, Inc. (AAPL) where liquidating hedge funds have sold the stock without regard to strong fundamentals.

Global SantaFe Corp. (GSF) where the pending merger with Transocean, Inc. (RIG) and locked-in dayrates provides a great return.

No one can know where the bottom is in a decline featuring forced unwinding of positions. The financial stocks have been the hardest hit, and may offer the greatest return — the subject for a future article.

Last 5 posts by Jeffrey Miller

• Obama’s “War on Business” - February 8th, 2010
• Weighing the Week Ahead: Psychology versus Data - February 1st, 2010
• Reacting to News: What to Make of Dubai? - November 28th, 2009
• A Tough Nut to Crack - October 29th, 2009
• ETF Update: Looking to the Internet - October 25th, 2009