Recent Run-Up is Fantasy

If you are feeling good now, given last week’s market performance, then you are living in a fantasy world – just like the traders who took the market indicators up. What we have seen over the last week are acts of desperation – people hoping against hope that all the bad news really isn’t all that bad and all the new news is just more of the same. And then, oh yes, the Fed is going to lower rates some more. Why they are going to do so seems less important to traders than that they are going to take interest rates down probably by a full half point. All this is the classic heads in the sand – and all this will come to an abrupt turn around when reality sets in again.

The extraordinary volatility of recent is just an indication of (1) how bad things really are and (2) how much people want to believe otherwise. After all, who wants to admit that we are probably already in recession and that things are going to get a lot worse before – way before – they get better. But no one can really turn their backs on the severe housing downturn, on the even more serious credit crunch, on surging oil prices, on the weakest dollar we have seen in a long, long time. These are the facts. These make utterly certain that the markets have not seen anything approaching a bottom and that they will all drop significantly in the coming days.

I would bet we will see some bank or financial institution go belly up in the coming week or two. But even if we do not, the continuing drop in consumer spending will scare people enough – correctly so – such that the markets will go down big-time again. It is almost certain that we will see the Dow down 20% or more before this month is out. The only sensible act at this time is to buy puts, and as many as you can afford. Such a play is not just sensible, it will buy protection against the near certain and major decline before us all.