Investing by "feel."

“Feeling” your way in investing. September15, 2008

When you woke up this morning and realized that two of America’s biggest brokerage firms were in serious trouble, two of her biggest mortgae companies had to be bailed out last week and foreign stock markets we down sharply, how did you feel?

Was therea bit of urgency in your attitude toward your investments? Was there a bit of adrenolin in your blood as you checked your portfolio? Did you finally decide to sell some of those dogs you had been hoping would come back?

Whenever an economic shot is fired across our bow, it makes us nervous. And nerve is an important feature of the stock market. Let’s review the first two weeks of September to see if we can find a clue about when the sell-off will end.

The first week, the TSX dropped about 5%. The market opened higher on the Monday morning, and then dropped another 5% by the close Tuesday. Do you remember how that felt?

Now try to remember how you felt Monday morning, September 15. Was there a bit of panic? Did you feel worse about the market on September 15, or a week earlier, on September 8?

Most of us felt significanlty worse on “Lehman Brothers Day” than a week before when the FED bailed out Fannie Mae and Freddie Mac. We felt worse, but the market did not drop down past its recent low.

This sets up a divergence between market sentiment [our feelings] and market price [the objective reality of the market]. This divergence is bullish. The market is nearer a bottom now than it was last week.