Carnage on Wall Street

The correction in the market that many market observers have been talking about for months finally occurred today with the Dow Jones Industrial Average falling 416.02 points or 3.29% in a single trading session, the biggest one day drop in more than 5 years. At one point during the day, the Dow fell as much as 200 points in just one minute. The Nasdaq fared even worse that the Dow, falling 96.66 or 3.86% today, wiping out all of its gains for 2007. Not a single sector of the market was spared and commodities like steel, silver and gold were the hardest hit.

Every single one of the 23 individual stocks I hold in my personal portfolios were in the red and the InsideArbitrage model portfolio, which was showing a gain of 95% (since inception) yesterday, retreated to a gain of 87.01% since inception. The only saving grace were the put options I picked up for the model portfolio as described in the section Hedging The Economy Through LEAP Puts. The put options for the mortgage lenders Countrywide Financial (CFC) and New Century Financial (NEW) are now up 78.86% and 447.22% respectively.

So what caused this sudden drop in the markets? It is usually hard to pin the movement of the market to a single factor and it is actually quite amusing to watch the media try to explain why the market moved in a certain direction almost every day. Amongst many other factors, the following events were weighing down the market today.

• The Shanghai Composite Index fell 8.8% in a single day, sparking off a global sell-off.
• The Indian BSE Sensex fell 1.3% today but has fallen more than 8% since reaching a record high of 14,652 on February 8th.
• Alan Greenspan, the former chairman of the Federal Reserve, made comments on Monday about the possibility of a recession in 2007.
• Spot prices for trucking continue to remain weak and railway freight volumes have slowed down leading a couple of analysts to make bearish calls on the transportation sector yesterday.
• The mortgage industry remains under tremendous pressure in the face of rising foreclosures and a fall in median home prices.
• The Dow had risen without a 2% correction for well over 7 months, the longest stretch since 1954.

I was having a tough time finding two new stocks to feature in the March 2007 edition of InsideArbitrage, which is due out in a couple of days, either because valuations were too high or the sector was facing a slowdown. A stock screen I ran last week finally brought up a company that appears to have excellent prospects and this market correction has made it even more attractive. If you are a subscriber, you should get to read about it when the next investment newsletter is sent out on March 1st. I plan to continue staying away from mortgage lenders, home builders and transportation stocks and focus on large cap or dividend paying stocks for the near future.