Wednesday, October 12, 2005


The House of Pain

I'd say welcome to my house of pain, but chances are you're already there. Down about $5,100 today.

When it comes to reading the current state of the market, there is good news and bad news. The good news is that, in my opinion, this is a simple panic, nothing more. Since the beginning of October, the small cap Russell 2000 is down more than 7 percent, and we are not even half way through the month! In contrast, the big cap S&P 500 is down only about 4 percent, and the mega cap Dow 30 is down even less. Since small capitalization stocks tend to have a large fraction of their shares held by individual investors, this means that the current downdraft in the market is led by people who, more often than not, let their emotions and not their intellect determine how they act. If the institutions like mutual funds were doing the bulk of the selling, I'd be more concerned. But this is not the case. The bad news is that for small cap stocks, the decline in prices will only stop when prices stop declining. If that sounds circular to you, it is.

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