This market comment is my attempt to get back to business, after the difficulties of recent events. I will be short and to the point. I hope you understand if the usual light hearted tone is absent.

The brutal sell off of recent days strongly suggest a short term bottom was put into place, and that a reversal is imminent.

When the Dow gapped down 300 points yesterday (Friday, September 21) we started phasing in a purchase program.

The factors leading to this junction are numerous:

1. The Fed model comparing consensus earnings estimates of the S&P 500 with the 10-year Treasury bond yield suggests the S&P 500 is undervalued by about 20%; This model is also followed by Abby Joseph Cohen of Goldman Sachs and Dr. Ed Yardeni of Deutsche Bank Securities. Barrons discussed this extensively this weekend.

2. Market Volatility Index reached historically high levels not seen since the Asian Contagion/LTCM fiasco of 1998. That break is a key technical indicator suggesting that a reversal in trend is nearing.

3. The increasing number of put purchases. The put/call ratio reached extreme levels, and significant put buyers coming out of the woodwork. The extreme put/call levels were signs of panic selling last week, and that's what accompanies bottoms. Its a good idea to "Buy Despair, and Sell Hope." We saw despair last week.

4. The Arms Index 10-day moving average has flashed not one but two critical buy signals. In the past 25 years, this indicator has accurately called market bottoms.

5. The advance decline ratio showed a undiscriminating dismissal of good stocks and bad, affected sectors or not. That also suggests the type of panic selling which makes a bottom.

6. The Fed's gradualism and the end of the rate cutting cycle has been postponed. The Federal Reserve's emergency 1/2 point cut -- and suggestions of more to come -- will help stabilize markets, liquidity and earnings.

Finally, consider the following: When is the absolute worst time to invest? Answer: Its when everything looks just great. As counter-intuitive as it sounds, when all the news is rosy and things look fantastic, that is your utterly worst investment window. Consider the following anecdote: Its early 2000 -- we survived the Y2K bug, we were in a new paradigm of infinitely spiralling profits of the new era. The Goldilocks economy was not too hot, not too cold. Traditional earning models were tossed out, as they failed to recognize that it was different this time. The IPO market was screaming. The Dow was at 12,000, books were talking up Dow 100,000. The Nasdaq was at 5100, and tow truck drivers were buying islands.

Q1 2000 was the worst investing juncture in 50 years.

Consider where we are today. There is fear and uncertainty. Panic has ruled Wall Street. Another attack is anticipated by 2 out of 3 Americans. Travel, hospitality, leisure, brokers, insurance, retail, etc. are all expected to be off or hurt by these events significantly. The economy will be tipped into a recession; A nation is in mourning.

There is no better time to invest in the market than under these conditions.

If the very worst time to buy is when everything couldn't be better, than it follows that the best time to buy is when everything looks like it couldn't get any worse. It takes bravery, it takes patience and skill. It takes resolve.

Here is my advice how to proceed from here:

I expect a snap back rally over the next week. It may be 5 or even 10%. A gradual grinding upwards to fill in the big gapdown. A lighter volume retest of last weeks lows shortly thereafter.

That's my framework. The risk in individual issues is great, due to sudden preannouncements, and lowered quarterly guidance. This environment makes individual stock picking particularly challenging; Instead, use the broader Indexes: The Nasdaq 100 (QQQ), The Dow Industrials (DIA), and the S&P500 (SPY).

Our approach is to scale into positions over weeks. We started Friday morning -- I usually refrain from buying in the first hour of trading, the Dow opening down 300 was just too tempting coming at the end of a 1200 point slide. The Nasdaq 100, off 70% from its peak, provides exposure to beaten down tech issues. Finally, the Standard & Poors 500 is a very broad proxy for the overall markets.

We will gradually add to these positions on down days, or on pullbacks after big gap ups.

One final note: Back on April 25, I exhorted you to "Spring Clean Your Portfolio". A big part of that was to reduce or eliminate margin debt. Again last month (August 8), in "Seven Steps to Improve Your Portfolio" on CBS Marketwatch.com, I again advised you to reduce margin debt.

I will repeat this one last time: BE CAREFUL WITH YOUR MARGIN. You need look no further than the very wealthy Bass family, who liquidated 135 million shares (two Billion dollars) of Disney below Market at $15. That's a hell of a margin call, and may very well be a multi year low for Disney. There are few things in the market worse than being forced to liquidate at the very bottom . . .

I strongly suggest that you add cash to your accounts, and either eliminate or dramatically reduce your margin debt.

--Barry Ritholtz

Copyright © 2001 Barry L. Ritholtz, All Rights Reserved worldwide. May not be copied, stored or redistributed without prior, written permission. Home

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