The Dow Jumps 900 Points. So What?

Only in today's market can the Dow have one of its biggest gains ever, on a day when consumer confidence logged its worst readings since it's been followed.

After the Dow's nearly 900-point rally today, on what seemed like nothing but loads of bad news, you're right to stand back and wonder what in the world to make of this absurd volatility -- and more importantly, how to invest around it.

The short, easy, and honest answer is that this volatility is spectacularly unreasonable, and you're foolhardy to try such an approach.

Think about it: Only a few weeks ago, the Dow soared an equally impressive amount -- 936 points -- sending a wave of euphoria over markets, as if our troubles were behind us. Within days ... poof! The gains were gone. There's little reason to jump for joy over today's gain, either. Call me a party pooper, but the bad news in the economy hasn't disappeared, my friends.

In the banking sector alone, the likes of Bank of America (NYSE: BAC  ) , JPMorgan Chase (NYSE: JPM  ) , and Citigroup (NYSE: C  ) all gained well into double-digit percentages today. That's spectacular if you're a leveraged hedge-fund manager trying to meet margin calls, but completely irrelevant if you're a long-term investor looking to own good companies for a long period of time.

During these tumultuous times, the most important thing to keep in mind is that the long term is your only hope for success, and the cacophony of short-term madness we've experienced has absolutely nothing to do with where we'll be three, five, or 10 years down the road.

Sit back. Marvel at the madness. Bottom-fish when things get ugly.

That's about all you can ask for these days.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase and Bank of America are Motley Fool Income Investor recommendations. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (17)

Comments from our Foolish Readers

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  • Report this Comment On October 28, 2008, at 7:23 PM, 181736065 wrote:

    Hi Morgan,

    This market is not behaving like a "healthy" market.

    But the optimistic thing is that there are signs of "credit conditions" easing.

    Sharp, violent upswings in bear markets are not unusual. But, if we can put several of these in a row (even with less dynamic reach), I will be more optimistic.

    Bill J.

  • Report this Comment On October 29, 2008, at 12:48 AM, NEWSMONKEY wrote:

    Sell this rally if you know what is good for you. The reasons are simple and relatively straight forward. Firstly, nothing has changed if anything things have gotten much much worse. The dominoes are falling one by one and leverage is getting wrung out everywhere. Consider Russia which had about 500 billion in reserves and a dollar squeeze of over 300 billion due to maturing dollar denominated debt. Russia is an outlaw in the financial markets consider this action they took today: Court Freezes Altimo's Stake in Vimpelcom http://online.wsj.com/article/SB122516354059275209.html?mod=...

    Further consider these articles today concerning the european nations and England

    Europe Faces `Huge Threat' as Emerging Markets Slide http://www.bloomberg.com/apps/news?pid=20601068&sid=aahr... or this article http://blogs.wsj.com/economics/2008/10/24/emerging-market-as... or this one which puts the The scale of euro zone loans at about $2.5 trillion in foreign-currency loans to emerging markets. http://news.bbc.co.uk/2/hi/business/7693020.stm

    European banks have lent heavily to crisis-stricken eastern European countries such as Ukraine, Hungary and Belarus. Their exposure which came to a head today makes the US sub prime mess look like child's play given there relative GDP size the problem is more than 5 times that of the US problems. Add to that Iceland, Turkey, Dubai, New Zealand, Argentina and Brazil thrown in just for good measure. These are problems only just coming to light today or in recent weeks. The world is an absolute mess and they are starting to fall like dominoes. Unfortunately once a massive deleveraging like this begins it won't stop any time soon.

    If you are kicking yourself for having not sold sooner don't miss this gift. The rally may last a day or a week but be certain it wont last. This is a prelude to an utter collapse. Consider this article by Nouriel Roubini, Who is he? He was the guy calling for this disaster over two years ago. The New York University professor who predicted the financial crisis in 2006 Bloomberg (October 27, 2008): Roubini Sees `Significant Downside Risk' for Equities http://www.rgemonitor.com/blog/roubini/ If you are thinking about buying now you should spend some time on his blog and I guarantee you won't.

    The monkeys on CNBC (my brothers) call for a bottom being made about 100 times a day. Before you commit the last of your capital trying to buy the bottom ask yourself this question. Who is dumber them for losing the first 35% or me for losing the next 35% because I thought I was smart? So what is the answer? Are you really that smart? Are you really that well informed? Or do you make most of your decisions based on what you see on CNBC?

  • Report this Comment On October 29, 2008, at 8:45 PM, 181736065 wrote:

    Newsmonkey,

    Here's something to really be concerned about..

    IMHO, the American Dollar has become the next BIG BUBBLE.

    However, I haven't read a thing about the meteoric rise in our currency from the Fool.

    I wonder why.

  • Report this Comment On October 31, 2008, at 12:07 AM, GoNuke wrote:

    fe3lixallen

    Exactly.

    People the world over have sold "everything", bought US dollars with the proceeds, and bought US treasury bills. Massive capital flight caused by irrational fear has pumped up the value of the US dollar. It is now significantly over-valued.

    I am coming to the conclusion that as clever as the Fools may be they have become promoters. I think it is probably unwise to keep your money in US assets. The Fool promotes US assets.

    I recall getting an e-mail from the Gardner's claiming to be my "financial advisors". This was in connection with convincing US Fools to lobby for the $700 billion bailout. Make no mistake, I support government intervention. It was lack of government regulation and oversight that caused the financial crisis in the first place.

    However, if the Gardner's really are my financial advisors why did they advise me to keep investing in the stock market when financial industry insiders knew that the world's banking system was essentially insolvent. The stock market is a subset of the world financial system. If the system goes bankrupt then the stock market fails -regardless of the quality of the companies that have issued shares. Good financial advisers would have "promoted" the notion of exiting the market back in March.

    I don't think the Fool is "educating" we foolish followers with respect to the currency crisis. Let me shed some light. The over-valued dollar is reducing inflation in the US. It is also putting lots of foreign firms at risk because they have large $US denominated debts. These firms are heading into a recession with a sudden 25% increase in their term debt. That debt is owed to US lenders. US banks face another round of toxic risk. US industry can't export because a) US goods and services are too expensive and b) foreign economies are staggering under the weight of the added debt burden. Even domestic capital has fled developing countries further reducing the likelihood of an export led recovery in the US.

    The US needs to burst this currency bubble quickly for its own good. We don't know how much of the US$ denominated debt issued by foreign firms is insured by credit default swaps issued by AIG a.k.a. the US taxpayer.

    What you can do to hedge is buy shares of good foreign firms using $US to buy ADR's. As the US dollar declines in value the US$ value of your foreign holdings will rise. You would; however, be well advised to follow the Fool's maxim and avoid firms with a lot of debt -it could be denominated in US dollars.

    Perhaps The Fool is not discussing the currency crisis because it is so US -centric. Perhaps they don't understand. I am Canadian. I spent my entire career exporting manufactured goods so I have some familiarity with currency risk.

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