Get Ready for a Potential Spike in Stocks

It was a nasty day on Monday that reminded me of the technology melt down in 2000 and Black Monday in 1987. The selling capitulation was evident, as about 2.8 billion shares traded on the NASDAQ, but the volume was not that bad given the degree of selling. Yes, there was selling, but it was not a mass market run to the exits.

Markets are now oversold and will attract some degree of oversold buying, but until I see the bailout legislation pass, I expect trading will continue to be volatile. Should a bailout package pass, I expect to see a spike in stocks, so you may want to get ready for this.

The government and Fed have lots of work ahead of themselves. The reality is that economic growth is worrisome, even in light of the bailout strategy. Recent economic data in the housing market and manufacturing are pointing to softness. We are not only seeing economic weakness in North America, but also overseas in key economic zones, including China, Japan, Europe and India.

The current situation is not a crisis, but you get a sense that there is much more bad news down the road that will hamper the economy and the ability of stocks to move higher.

The bottom line is that there is no guarantee on the effectiveness of a bailout, as the situation appears to be much worse than we are led to expect. Again, I do not view a bailout as an invitation to jump into stocks with a vengeance, but I do advise prudence and emphasize that trading will continue to be characterized by high risk.