The Fear is Rising and The Market is Swooning

Today was another ugly day in the market. The VIX indicator of fear jumped 25% today as the DOW accelerated its fall in the afternoon to end down 733 points. Most of the earnings reports matched or beat estimates for this quarter but the expectations for the fourth quarter proved gloomy. This morning September retail sales were announced and they dropped .6% which was three times worse than expected. The market hated those numbers and discussion about how bad and how long the recession would be dominated the chatter all day.

The precipitous decline in all the stock markets at the end of the day leaves us in a position to potentially test last Friday's lows tomorrow morning. Many more companies will report their third quarter earnings tomorrow including Continental Airlines, Southwest Airlines, Citigroup, CIT and GAP. However, there will be great anticipation for Google's numbers which come out after the close of the markets tomorrow. Google's stock price is half of what it was at the beginning of this year and it should be able to grow 15-20% for the foreseeable future. This company doesn't have any debt and it holds plenty of cash so it is definitely a survivor. If the company reports weak numbers, the stock will likely drop and it should be bought and put away for five years when its price will likely be much higher than it is today. A weak Google number would also give a negative tone to the market for the rest of the week.

It looked like we had capitulation last Friday when the market dove in the morning on high volume and record fear but then recovered in the afternoon. It was then followed by the 900 point gain on Monday. We said the market likely bottomed on Friday but there will remain much volatility in the market. Tomorrow may be the true test. Mutual funds may again see redemptions and the continued selling by hedge funds might also provide weakness but a swift sell off in the morning will also likely generate new buy orders as the day closes out. Last week we had high hopes for the government to put equity into some banks as a catalyst for positive news. Tomorrow there doesn't appear to be any good news coming. Fear is high and volatility will continue. Cash is the most precious asset in these markets and we reiterate that quality companies are the only ones that should be bought.