September selloff ended today [Sept16,08]

September Selloff Ends

For now, it looks like the selling is over, having ended between 2 and 3 o’clock today.

The key occurance was the final flushing of finacial stocks out of the large pension plans and mutual funds. These mega-investors found themselves in an awkward position last year at this time. The summer 2007 selloff came with a warning about subprime mortgage woes: but the mega investors were seriously over invested in bank stocks and mortgages. Their systematic selling program began.

And, this afternoon, those selling programs were mostly completed. The next few days should give us the final verdict: can the stock market move up from here?

Here is an observation on both the Canadian and US markets:

The Facts: The financial news in September was even worse than in July. In July, we were worried that Fannie and Freddie were in trouble. In September they actually had to be bailed out. In July we were worried that Lehman and Merrill were in trouble. In September, one was bought out and the other went under.
The Emotions: In September, investors were more worried than they were in July. Would the US financial system hold up?
The Prices: The financial stock indices held well above their July lows even though Lehman Bros. went bankrupt. In spite of the extra bad news in September, the financial stock indices did not sell off to new lows. And, today, the selling abated and the buying came back. The crisis appears to be over.

There is a divergence between investor emotion and price. That’s what happens at the bottom.

Caveate emptor: this argument is the logic that tells us a short term stock market bottom occurred today: but, in the financial world, anything can happen. Good luck.