Monday December 1, 2008
Navivest

A simple law of gravity states that what goes up must come down and that applies to stocks as well. Last week, as stocks rose two days in a row, then three, in a very challenging economic environment, we were of the view that the moves did not make sense.

Consequentially, we recommended that subscribers to our Options Capitalist and Navivest Equity Trader take short positions. Those positions paid off rather well today as the stock market took a major tumble.

Partly responsible for today’s action, was possibly the chickens coming home to roost. Last week, the stock market ignored dismal economic data, including poor housing, consumer confidence and jobs numbers.

Adding fuel to the fire, we also got news today that the U.S. economy, according to the National Bureau of Economic Research, has in fact been in a recession.

To the extent that the economy had not had prior back-to-back sequential quarterly declines, the government refused to acknowledge this fact

The National Bureau of Economic Research on the other hand, does not use the official definition of a recession. It instead looks for broad-based declines in economic activity and according to its definition; we have been in a recession since December 2007.

There were probably quite a few stock market participants who got caught in a bear market trap today. After watching stocks rally for four days and worried they were missing out, they probably jumped in on Friday only to get beat up today.

On Wednesday, we posted an article on this blog that said the trade for that day was to exit long positions if you had been lucky enough to get in between the prior Friday and Tuesday, and to just sit out the rest of the week, because of Thanksgiving. As aforementioned, we also put our subscribers in short positions.

The bear market action today was very aggressive. At 3PM, there were four stocks among the S&P 500 stocks that were up, although two were up less than $0.10 and one was up less than $0.50. At the close, only one of those Rohm and Hass (ROH) was still up.

By the end of the day, the Dow had shed 7.7%, the Nasdaq was down 8.95% and the S&P 500 was down 8.93%.

Tags: Recession  Bear Market  Dow Jones  Nasdaq  S&P 500