Market Crash Update

Written by Dave Young, president

photo by fotologic

After falling all week, today the panic selling intensified with the Dow Industrials dropping 700 points at the open only to reverse course and completely erase the loss in the first 45 minutes of trading.

That represented a 1400 point swing. Then through the rest of the day the market moved in a 1000 point range. The Dow Industrials closed down 128 points on the day after one of the wildest rides I've ever seen since the 2002 bear market. One the week, the Dow lost 18.2%, making it the worst waterfall type declines since 1987.

Both of our primary portfolios have done better than the broad market, but have still suffered. Paragon's Managed Income has been holding about 40% cash and several traditionally defensive positions through this decline. Paragon's Top Flight has been holding 10-15% cash and about another 35% of the portfolio in traditionally defensive positions. Our problem has been that those traditionally defensive positions in both portfolios have been sold in this panic with everything else. While they have provided some protection, they have not helped anywhere near as much as they usually do.

One of the highly respected research services we subscribe to uses 12 separate indicators to identify when the stock market is at a bottom.

They look at the seven bear market bottoms through 1982 and what the measurements of these indicators were then. When a majority (7) of the indicators flash that has historically meant we are at or close to the bottom. Currently, there are an unprecedented 10 indicators that have triggered. That is more than have ever triggered in any market sell off. There is no way to know "if things are different this time," but based on history, it appears we should be close to a bottom.

A few other things to consider:

-- This recent decline is the type of waterfall decline that usually occurs at the end of a bear market when fear feeds on itself.

-- With declines ranging from -24% to -67% around the world an incredible amount of bad news has been priced into this sell off. With so much bad news priced in, as all of the global governments begin to implement their bailout programs, it should be very positive for stocks.

--The median recovery from a bear market decline of -33% has been +55%.

-- This is not the first time there have been massive government bailouts. In 1907, 1984, and 1989 bailouts occurred near bear market bottoms. Nine months after the bailouts, the DJIA was up by 26%, 9% and 29% respectively.

I obviously don't want to infer that I can see into the future or that I can guarantee we are at a bottom.

However, I do think that it is important to understand what has happened historically when the market has been in similar situations.

Market declines are painful. That pain usually translates into a panic. Emotional decisions quickly made in a panic state are usually wrong. This panic has priced our market a the same level it was in June of 1997, eleven years ago. Just as we have in the past, we will continue to follow our discipline through this decline and out the other side of it.

Please call us if you would like to talk. You can reach us at 801-375-2500, Mon.-Fri. MST.