INVESTING: Don’t get complacent; stocks may fall again

Hurricane season in the tropics is coming to a close. Some damaging storms came through, but nothing Katrina-like, and for that everyone is grateful. No, the real devastation this year wasn’t in the tropics. It came on Wall Street in the form of the stock market crash. And there is no denying that a crash is exactly what happened.

The scientists at the National Weather Service have a system of rating the strength of a hurricane. Sustained winds of 74-95 mph earn a Category 1 rating. Winds of more than 155 mph are Category 5, which is the strongest rating.

Well, if the National Weather Service were in charge of rating the power of the recent stock market sell-off, it would have to invent a Category 6. The longtime historical records fell by the dozen. We saw the worst weekly decline in history. We experienced the worst year-over-year decline ever. We watched indicators drop to near zero, only to have them fall even lower the next day. It was incredible to watch all this from the sidelines. It is times like this that keep me passionate about what I do for a living.

Is there anything you can take away from these record-setting times you can use to your advantage? Yes! First of all, do not treat this as business as usual. A typical quote from a local survey of several advisers is, “Stay the course. Think long term.”

While a new bull market certainly will come out of this mess, it may take the Dow back only to 13,000. Staying the course could mean years before you get back to where you were a year ago. The first course of action is to step up your game as to whom you are receiving financial advice from. Modern portfolio theory is a busted model that has contributed greatly to your current problems. The last bear market, which ended in early 2003, led a lot of people to believe diversifying was an easy path to longterm wealth.

As I have said many times, however, that bear market left a lot of unfinished business. Apparently I was onto something, because the last few weeks have wiped out most of the gains from that entire move. What took five years to build took only a few weeks to destroy. The reason is simple: There is nowhere to hide in a real bear market.

The thrashing of early October set the stage for a snap-back rally, and I believe one is unfolding now. But it could be a pretty wild affair for several weeks. A careful look at a chart tells me that the Dow Jones industrials could bounce all the way back to 11,000 over the next few months. And even though what I am about to say sounds incredible in light of the damage already done, I don’t think the ultimate lows of this bear market have been seen yet. Certainly, a lot of pieces are in place that justify a move higher. But the larger probability is that the downtrend is still in place and will reassert itself after a relief rally plays itself out.

That cheered you up, right? Look, I am not here to lift your spirits; I am here to help you make money. Times are changing rapidly, and you have to answer the challenge by changing just as quickly.

On a different note, I will be in New York next week doing Fox Business every day from 9 a.m. to 10 a.m. Tune in if you can. I would appreciate your support.