LANDSLIDE!

That's the only feeling I got from the market today. And what a great day!

Great day? Yes! Big drops like this are precious times where portfolio managers like us get to really stress test our portfolios! :) No amount of hypothetical tests can exactly duplicate the effects of a real occurrence on a portfolio. The Dow dropped the biggest single day drop since the 387.18 points drop of 9 Aug 07. I must admit that I was really surprised with the magnitude of the drop, especially when the slight pull up at mid day almost convinced me that the market has found a botton. Well, as a faithful technical trend follower, I never act on prediction. I will always look for definite signs before acting on it... and am I glad I stuck with it.

This drop has brought the Dow back almost all the way down to its 30WMA. In fact, the Dow could drop another 122 point or so to land on the 30WMA level at about 13400 before staging a rebound. The Dow always back down to its 30WMA due to regression to the mean (the mean here centered around the 30WMA) caused by the law of diminishing marginal utility of investors. With the market moving towards more and more efficiency (I'm not suggesting that the market is efficient as suggested in the Efficient Market Hypothesis), periods of explosive gains would pullback down to the mean more readily than we have witnessed before the great bear market of 2000 - 2003.

The market outlook has turned slightly sour lately as possibilities of another rate cut sinks below the quicksand, leaving behind the certainty of decelerating economic growth ahead. The Feds continue to look more inclined to a contractionary monetary policy, as they always have since inception. Before any of you throw curses at the Fed, I must say that their job is an extremely difficult and sensitive one, making decisions that nobody likes to make, deserving more praise than curses. On the one hand, they need to combat inflation and on the other hand, they need to make sure what those actions do not result in a depression! It is such a fine balance that these guys literally live their lives on a balancing beam. As Chaos Theory so correctly suggests, that the transition from stability to chaos in a complex system is often occassioned by the change in a single variable. The problem here is, nobody really knows what that "single variable" is until hindsight! That makes the Fed's job look like a man leading a team through a minefield. As investors, it is always prudent to keep a farsight during uncertain times like this.


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