The Dow pretty much gave back all of its 290 point gain on Monday with yesterday’s 280 point drubbing. The market was nervous after it was reported that Lehman Brothers (LEH, $7.79, down $6.36) had failed to attract a buyer for some or all of its assets and it only got worse with the sell-off in Energy stocks. The Dow made it into positive territory shortly after the open but was back in the red within the first hour of trading. The decline picked-up pace in the final hour and when it was all said and done, all three major indexes lost well over 2%.
The Dow finished Tuesday’s session at 11,230. The Nasdaq fell 60 points, or 2.6%, and ended at 2,209. The S&P 500 took a 3.4% pounding, dropping 43 points to close at 1,224. I said Monday morning before the market opened and the futures were up big-time that although we were headed for a huge rally, it appears traders are selling into them. That was confirmed once again yesterday.
Another point is that we all know triple-digit gains are pretty much the norm these days but have you noticed that we are now getting 200 and 300-point up and down days on the Dow. It’s almost gone unnoticed by the general public because everyone seems to be scared of the market or is not interested.
The fact that the market rallied on the Fannie Mae (FNM, $0.99, up $0.26) and Freddie Mac (FRE, $0.88, unchanged) bailout was our rally but it doesn’t set a good example. Without getting long in the tooth, who’s next? Will it be Lehman? Or will it be Ford Motor (F, $4.40, down $0.15) or General Motors (GM, $10.76, down $0.07)? I could care less about Lehman but why not grab the bull by the horns and give Ford and GM the incentive or cash to bring hybrid cars to the market quicker? The point is “the market can remain irrational longer than you can remain rational.”
Keep this in mind and don’t get too comfortable with any trades. The market could be setting up for an explosion to the upside or an implosion to the downside. Don’t forget we are historically in a lousy couple of months for the market (September and October) and something has to give. The VIX (VIX, 25.47, up 2.83) is heading towards 30 which could be when the bulls make their stand (or their last stand). I’ll talk more about the VIX over the next few days.