Blog : Dead Cat Bounce?

by Ed Zwirn on August 28th, 2013

dead cat bounceIt's called waiting for the other shoe to drop.

With the U.S. apparently readying to embark on yet another armed conflict, with some sort of military action expected to commence against Syria as soon as tomorrow, and the Federal Reserve set to make its next policy statement on Sept. 18, the stock market is reacting as expected to this uncertainty, hurting both penny stocks and other small caps while benefiting commodities like gold and oil.

As costly as war can be both in monetary and human terms, financial markets have been known to thrive in wartime, and can even tolerate peace. It's not knowing which way things are going that sets the market back.

The stock market has basically tanked throughout the month, with the Dow Jones Industrial Average losing more than 5.6% between Aug. 2 and Aug. 27.  And whether weakness is really all about Syria, the U.S. economy, the FOMC, or simple summer drifting, the selloff became much more much more pronounced on the last day of this downturn, with the DJIA losing 1.1% yesterday alone and the broader NASDAQ losing more than 2%.

The question remains over whether today's partial comeback (the Dow recouped 0.33%) is a "dead-cat bounce" or the start of a solid market trend. The market's performance this month is still a long way from the 10% loss required to fit the "official" definition of a correction, but it is still disappointing enough to cry out for some explanation of what is going on.

At least part of yesterday's market downturn can be attributed to uncertainty over the course of events in the Middle East. The Syrian situation is likely to be clarified tomorrow, when some sort of military action is expected over there. Assuming that the strike against this suffering country is contained and doesn't escalate rapidly into a regional conflict (and that's an assumption), the market for everything from penny stocks to blue chips ought to get back on track, at least as far as that factor is concerned.

Of course, that leaves investors little breathing time between Syria and the FOMC statement to be issued on Sept. 18. The common wisdom here seems to be that this announcement will be Bernanke's last chance to upset the applecart, as he would presumably be reluctant to do so in later meetings, which will come shortly before he leaves office in January.

The upshot for penny stock investors is that they are likely to see at least a few weeks of uncertainty impacting the market risk of their portfolios. And as if Syria and the FOMC haven't proved to be fun enough, there is still the next U.S. debt ceiling "crisis" to look forward to.

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