photo by eustaquio santimano

Written by Dave Young, President of Paragon Wealth Management

Yesterday we were reminded that investing in the stock market still involves volatility.

For the past 14 months we’ve seen a phenomenal rally off the March 2009 lows. Yesterday we saw the market “freak out” bringing back memories of the 2008 bear. The VIX increased by 60% yesterday and hit almost 41, which indicates extreme fear.

Why all the drama?

Greece hasn’t yet figured out that socialism doesn’t work and has come asking the more responsible Euro countries to bail them out of their financial mess. The other Euro countries agreed to bail them out with a 141 billion dollar package, but told them that they would have to cut back on spending and implement an austerity package. That caused rioting in the streets (the Greeks just wanted the money they didn’t want to cut back on anything). The rioting was picked up by the media and played over and over all day long.

The news and video from Greece caused traders and investors to assume the worst.

What if this rescue of Greece doesn’t work? What about the other “spend more than you have” countries like Italy, Portugal and Spain? Are they next? As traders assumed the worst, they panicked and sold their investment positions. That took the market down about 3%.

Then, just to make it interesting, there were some problems on the trading desks. No one is sure what happened, as it is still being investigated, but the rumor is that there were some huge trade errors that took the indexes down hard and fast. Then, just as fast as they went down, they recovered.

The market went from being down 3% to 5% to 10% in a matter of minutes. Then, just as fast as the market corrected itself, it returned to being down only 3%.

Even though the drop was temporary, the HEADLINE NEWS will most likely say that the Dow dropped 1000 points, which is the biggest drop since the 1987 crash.

So what’s next?

I wish I knew, but I don’t. In the very short-term (days), depending on the news, this market could move harder down or swing right back up. Yesterday’s market was very unusual.

I can speculate though. If this is like the majority of panic sell offs in the past 100 years, then calmer heads will prevail once traders decide that it’s not as bad as everyone imagines. If that occurs, then sometime in the next few days or weeks, the market will recover its losses.

On the other hand, perhaps we are on the beginning of a contagion that will take the market lower. No one really knows.

In the coming days the pessimists will be outlining “end of the world” scenarios and the optimists will ignore the market action altogether.

One thing for sure, if you act on your emotions you will likely do the wrong thing.

The bottom line, we won’t sell in a panic situation. That is always a mistake.

However, if this sell off does continue to unfold and gain momentum, then we will follow our models and rely on them to guide us through this.

Feel free to call us 800-748-4451 if you have any questions or concerns.

Paragon Wealth
is a provider of managed portfolios for
individuals and institutions.  Although the information included in this
report has been obtained from sources Paragon believes to be reliable,
we do not guarantee its accuracy.  All opinions and estimates included
in this report constitute the judgment as of the dates indicated and are
subject to change without notice.  This report is for informational
purposes only and is not intended as an offer or solicitation with
respect to the purchase or sale of any security.  Past performance is
not a guarantee of future results.