Roller coaster ride

Lehman. Merrill Lynch. AIG. Washington Mutual. These were some of the big names whose scalps were claimed quite recently in the financial turmoil which unfolded in the past week or so. However, as some of the investors stayed at the sidelines, others who had bought on the recent weakness saw some rewards after plans were unveiled to save AIG and the Fed announced a huge bailout plan for banks. Questions abound in the markets on whether this was a time to stay vested to ride the eventual rebound from current levels. Before retail investors like us start to get carried away and put our entire house mortgages in the markets, it is better for us to think of the signs and symptoms that this might still be a bear market rally.

1) The bailout plan is still a plan after all, not a consequence. It is still debatable as to whether the Fed should, and can, rescue the banks that have fallen. It is arguably a distortion of the markets for the Fed to continually rescue the banks, and might merely delay the eventual selldown of the markets. The markets might be reacting to the prospects of a renewed banking sector, taking note that the stock markets are generally leading indicators rather than accurate indications.

2) The bottom of markets might probably only be found when the selling reaches a climax, i.e. prices stop going any lower despite bad news unfolding. I personally believe that perhaps good news of this magnitude might not be an accurate barometer of the reversal of the markets.

3) Notice the selldown recently before the news was unveiled. This might have been the work of short sellers taking to profit from the weakness. Similarly, the sharp rally might have been short-covering by this group of traders. Just simply what I thought of, sadly there's nothing to back me up on this claim;)

I wrote this post not for the purpose of making a market call, that the bear market is not over yet, but to remind investors like myself not to be complacent and over reliant on the Fed to clear up the mess. The mess might need to culminate in a selldown of extraordinary proportions before we can say a market bottom might have reached. Thus, it is essential again for all of us to invest in the markets only when valuations are truly attractive. No point looking to vest in counters which might still be at premiums despite the quite recent selldowns in the hope that they will fetch higher ratings in future.

Just some reality check there.