Festival of Falling Knives, Continued

Apparently, the "festival of falling knives" that I found so impressive two days ago was just the beginning. On July 24, a three-year record was broken on the NYSE when 351 companies listed on that exchange traded at their lowest prices in the last 52 weeks. A day later, 418 companies hit new low prices, even as the Dow Jones Industrial average recovered some of its losses from the day before.

Today, the Dow Jones Industrial Average suffered the biggest one-day loss since February 27, but much more significantly, 780 companies hit new low prices for the last 52 weeks - over twice the number that hit new 52-week lows on any day in the last 3 years. After the incredibly strong stock market performance that we have seen in the first half of this year, and with problems with subprime mortgage lending starting to snowball into what Barry Ritholtz has dubbed "The Great Credit Contraction of 2007", I have to wonder whether this market has further to fall. I also have to wonder whether it will be quite a while before the Dow Jones Industrial Average closes above the DOW 14000 mark that everyone (ok, not everyone) was so excited about just last week.

Does this mean that you should run out and sell all of your stocks and mutual funds? Certainly not. Only a few people are successful at timing the market, even when they have a well-developed system that they apply rigorously. This might be a good time to sell any stocks that have already hit the price targets that you have set for them, though, and to ease off any buying of high-risk shares - remember, high PE stocks tend to fare poorly in a serious market correction.

This is also a great time to buy high quality investments selling at low prices that are poised to benefit from the effect of a falling dollar on overseas sales. Two that come to mind, because I already own shares of them, are Johnson and Johnson and GE. Both have been market laggards over the last few years, but several trends are aligned in their favor, as I plan to detail in my next post.

Until then, I suggest that you remember the immortal words of Douglas Adams, as you keep a cool head during this sell-off:

Don't Panic!