Stay Puft Marshmallow Man Eats Wall Street !

Watching the market Wednesday and early Thursday, I was taken back to Ghostbusters and the scary bit at the end where Dan Akroyd can't keep his mind a blank -- and inadvertently summons up a monster that will bring about a reign of Old-Testatment-style terror and destruction. "It's.... the Stay-Puft Marshmallow Man."

What makes it so funny, of course, is the incongruity. It's only the Stay-Puft Marshmallow Man. But he's about 300 feet high, and has been raised to life, by a 20,000 year old demon from hell named Zule, who has been let out by the Gatekeeper and is now really going to kill pretty much everybody.

So how do you know which reaction -- laughter or sheer panic -- is appropriate? Are we watching a fun, summer movie -- or is this the End of Days?

"Wall Street stumbles," the Journal headlined his morning. "Recent economic news should inspire alarm," a Yahoo Finance header continues.

Are we really, as some seem to fear, on the edge of a 2009-, 2008-, 2001-, 1987- style abyss? Or, alternatively, are we in the midst of a sprint to Dow 25,000 and can safely belittle the storm clouds that seem to be building?

There are two keys to getting through days like the one we had on Wednesday, and, happily, they go together -- even reinforce one another.

Key #1 is to figure out whether you're really plunging towards the earth, with a few bumps up along the way, or are, instead, taking off in an airplane or a rocket, but with a bit of inevitable turbulence.

If you're plummeting down, you'd better open a parachute. (Sell and even go short.) If the plane is rising, that could suck you into a draft and get you killed. (You'll be selling high and buying higher.)

So, is the market trending up, or trending down of late? I'm looking at the charts of market activity in recent days and months, and having a hard time seeing a down trend.

Down days? Sure. Markets seldom go straight up. As Ed Seykota observed, they wiggle, they meander, they bump, they correct.

Furthermore, this doesn't mean one shouldn't be prepared for a downtrend. There are going to be more bear markets in the future; you can count on it.

But how do we tell when we are past the wiggle-and-correct phase, and moved into a fundamental trend downward? When the market starts hitting new lows, or follows each consolidation with a move not down, but up. When it falls unexpectedly, especially on a day where there isn't a big piece of bad news, and it falls, not by Wednesday's 2 percent, but by 5, 10 percent and more.  

A very wise investor used to write down, for any of his positions, what kind of change or event it would take for him to change his mind. He would pull that card out on days when his position was suffering -- which could be an up day, for a Bear who's short, or a down day, for someone who's long the market -- as a reminder that, whatever was going on wasn't necessarily something that should cause him to panic.

(Though you should always be analytical.)

This, it turns out, can be very helpful in carrying out down-day Key #2 -- managing your emotions.

Notice, please, I said manage them -- not abolish or annihilate them or ignore them, because you can't. We're human beings. We have feelings. You can't wish or will them away. What you need to do is, govern them. Accept them, rationalize them, and move on.

Indeed, proper management of your emotions can be a spur to your analysis -- to Key #1. When you start to see events that make you feel scared, you acknowledge that you're scared -- and go back to figure out whether it's something that signals a real change in market trend, or just a squiggle-bump-twist-wiggle.

To me, considering what is going on in the U.S. and the world, we're not close to an unexpected, trend-reversing selloff. The world's first great democracy is going bankrupt, the U.S. is about to hit its own debt ceiling, the employment and industrial production and housing numbers are incredibly weak, and... and...

... and we have a 2.3 percent selloff?

If it's black, with shiny skin, jumps around like a dog -- in short, if it looks like Zule, barks like Zule, hand meets the definition of Zule that you have in your brain for times like these -- then it's time to act like it's Zule, and restructure your portfolio. Just take out your picture of Zule and compare.

Right now, this market to me looks more white, soft, puffy... like something you would stuff in between a piece of chocolate and a graham cracker. As of today -- emphasize as of today -- it's.... the Stay-Puft Marshmallow Man.
 

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