Fools Rush In

We are 1 hour into the close of the most dreadful week in the market. As I type this, the DJIA is 4% down and the S&P 500 has lost 5.6%. For a Friday, volume is very high. 8 billion shares and counting traded on the NYSE.

The big question is what happens on Monday when markets open? My guess is that there may be a huge gap up or we fall into oblivion. G7 meets over the weekend and the outcome of their talks will determine our fate. So far, investors don't seem to be paying any attention to any news from the bureaucrats.

While I can not pinpoint what will happen next week, I expect that the current state of fear will be followed by a phase of desperation. We will then see a huge swing upwards just as fast we have declined.

The 2nd phase will be followed in the weeks to come by another massive sell-off that will see the market retest this week's lows. It is during this 3rd phase that most investors call it quits and liquidate everything. After which we will return to 'normal' trading and retrace our way back up slowly.

I don't expect a quick return to normalcy owing to the magnitude of the housing woes in the U.S. The jury is still out regarding the nature of global recession and it will be a while before the situation becomes clear.

As far as trading is concerned, the 2nd phase is the worst time to buy shares unless you are in it for the long run. However, this will be an opportune time for anyone wanting to exit the market.