Printer Friendly View (with text zoom)

	STREET SMART SCHOOL The Library
A service of streetsmartreport.com

Library Home    Street Smart Report Home

BEING STREET SMART 

by Sy Harding

FROM WALL STREET WITH LOVE! February 1, 2008.  

At the market low two weeks ago the Dow and S&P 500 were down 15.5% and 16.3% respectively. It was nerve-wracking for most investors – panic-time even for the Federal Reserve.

But fortunately for many investors Wall Street had earlier provided a number of areas that would be safe havens should the U.S. market run into a serious correction or bear market.

For instance, with global demand extremely strong, investors could be assured that the energy sector would hold up well. And with oil at record highs and rising higher, oil related companies would continue to thrive regardless of an economic slowdown or a market decline in the U.S.

Oh, but unfortunately it hasn't worked out that way. The average energy etf (exchange-traded-fund) was down 16% when the Dow was down 'only' 15.5%. The CBOE Oil Index, consisting of fifteen large, widely-held integrated oil companies, was down 17.3%.

Well, okay, but high dividend paying utilities would be a safe haven.

Well, no they weren't. They haven't been in previous market downturns, and haven't been in this one so far. The DJ Utilities Average was down 16.1% two weeks ago when the Dow was down 15.5%.

Alright. But Wall Street also said if investors would diversify into international markets they would spread out their risks, and be participating in global economies which were much stronger than the U.S. economy. That would be a safer haven.

Well, darn. They weren't right with that one either. Investors should have been forewarned that they wouldn't be, since foreign markets not only declined last year when the U.S. market suffered two ten percent 'pullbacks', but most declined more than the U.S. market in those pullbacks.

And sure enough, in this correction they also plunged considerably more than the U.S. market. While the Dow and S&P 500 were down 15.5% and 16% at the market low two weeks ago, most global markets had dropped more than 20%, the official threshold of a bear market.

For instance, markets in Germany, France, and the United Kingdom were down 20.2%, 24.8%, and 17.1% from their 2007 peaks. The Morgan Stanley Europe Index, consisting of 15 European markets, lost 20.7% of its value.

In Asia the carnage has been even worse. Japan, Hong Kong, and China each plunged more than 31%. Even leaving Japan out of the equation, the iShares Pacific Region–ex Japan etf plunged 26.9%.

Well, how about emerging country markets? They would be safe havens because they trade more with nearby countries, so are less dependent on the U.S. economy.

Based on two popular funds specializing in those areas, the Van Kampen Emerging Growth fund, and the JP Morgan Emerging Market Fund, that safe haven idea didn't work out either. The funds plunged 18.5% and 17.5% respectively.

No wonder then that so much money has been piling into gold, commodities, and treasury bonds, and even more than that - into money-market funds (cash).

Even more difficult to deal with than the plunging prices has been the volatility, the big ups and downs within each trading day, and from day to day. Triple-digit daily moves by the Dow have become the norm. What on earth is causing it?

Well, it's another gift from Wall Street. They're so good to us.

The answer goes back to the infamous 1929 crash. The crash was exacerbated by 'short-sellers', who rushed in to push declining prices ever lower. Selling short consists of selling shares you don't own. A trader borrows the shares from his broker and then sells them for you, the money going into your account. The idea is to buy them back at a lower price, and then return the borrowed shares to the broker. The difference between the higher price at which they were sold, and the lower price at which they are bought back, is your profit.

The Securities Act of 1934 was enacted to try to prevent a repeat of the 1929 crash, and horrible 1929-32 bear market. One of its provisions was the so-called 'Uptick Rule'. It said a 'short-seller' could not relentlessly sell a stock short when it was declining. Each short sale order had to wait until there was at least one trade at a price higher than the previous trade, an 'uptick'. Great idea. It worked quite well for all those years from 1934 until 2007.

But in July, 2007, the SEC quietly agreed with a request from the NYSE to abolish the uptick rule. That protection from volatility is no longer there.

Since then, even when the market is already declining sharply, traders can jump in with short sales and just keep pounding it lower. That produces extreme oversold conditions, so the rally back up to whatever is to be its normal level for the day also takes a big move. Voila. Extreme up and down volatility.

Isn''t Wall Street kind to us with it's 'don't sell just move to safe havens' ideas.

And abolish the uptick rule? Sure why not. Investors will love the whipsawing volatility.

And aren't the regulators kind to the investors they are supposed to be protecting by going along with it all.

Sy Harding is President of Asset Management Research Corp., and publisher of the financial website www.StreetSmartReport.com, and the free blog www.SyHardingblog.com. He also authored the timely 1999 book Riding the Bear - How to Prosper in the Coming Bear Market, and 2007's Beating the Market the Easy Way - Seasonal Strategies that Double the Market!

Back to the Top    Library Home    Street Smart Report Home