Finding The Bottom

On days like today we find ourselves recalling old spy movies in which the evil mastermind's hidden button makes the floor drop out from under the hero, plunging him to certain doom below. Against all odds, of course, the suave secret agent always finds a way out. Nevertheless, the sudden slide must be unnerving. So it is with the stock market when the bottom falls out: sometimes the only way to get back up is to go down first.

In saying this, we do not mean to downplay the magnitude of recent losses. We do suggest you keep them in perspective. It was only a week ago that the Dow Industrials closed at 14,000 for the first time. From then through today's close, the blue-chip benchmark is off -3.8%. So after a near-meltdown in junk bonds, multiple hedge fund blow-ups, earnings disappointments, emerging market chaos, and widening weakness in consumer spending - the Dow fell less than 4%. This doesn't strike us as reason to panic. If anything, it is a sign of considerable underlying strength.

Underlying strength or not, it is entirely possible the situation will get worse before it gets better. The penetration of the June low points is particularly troubling. Yet it is also possible that today's high-volume sell-off will prove climactic. If the weak hands are now flushed out, the way is clear for stocks to move higher. Time will tell.