Dear ,

Fear that the economy may be headed for another recession drove markets to their fourth straight session of losses last week. Mounting anxiety has been easy to see in Wall Street's key measure of volatility, the VIX*, which soared 35% Thursday following a rash of downbeat economic reports. The Volatility index spiked to a close of 42.7 as all three major U.S. stock indexes plummeted. A VIX reading higher than 30 is considered an indicator of heightened fear.[1]

Both stock indexes and the VIX have seesawed in recent trading sessions, and the VIX itself is up over 140% year-to-date.[2]  The wild intraday swings and day-to-day movements have been too much for many investors to handle, and many it seems, are taking the 'sell first, ask questions later' approach. Is taking such an approach wise?

It depends on who you listen to. If you read the financial press or watch CNBC you're likely to hear advice like the following:

"Admittedly, no one can foretell the future, and past performance cannot be relied upon to predict future results. Even so, when we look back upon the 15 trading days since 1950 in which the S&P 500 Index was down -6% or more in one day (We experienced a 6.66% decline on August 8th), the performance of the index for the one year that followed averaged 21.25%.[3]  For this reason and others, we do not think that now is the time to act rashly by altering your long term investment strategy."

Here is the problem that I have with this advice. It is simply using a historical average without looking at the totality of the circumstances. Let me give you an example of how useless averages can be for forecasting. The Dow has averaged between 9% and 10% over the history of the market, depending on who's study you are looking at. How many of you have averaged 9% to 10% on your equity investments over the last 10 years? I would guess none!

Now let's take a look at the example above. The S&P 500 peaked on October 10, 2007 at 1,562.47. It had its biggest one day drop of the last crash on October 15, 2008. The S&P 500 lost -8.72% in one day, closing at 907.84. Now one year later the S&P 500 was at 1092.02 which was a 20.28% gain, seeming to verify the statistics from above. The problem is that even after that 20.28% gain you are still down over 30% from the all-time high! ((1092.02-1562.47)/1562.47) Might it have been better to get out long before you reached that point?

Folks, I think the more important question to ask your self is this:

Which is more important to you, protecting what you still have or trying to make up for the losses of the last crash? If protecting yourself from loss is the more important issue for you then I would suggest that you consider a more defensive investment strategy. If you're not sure how to do that give us a call!

Regarding the economy itself, the world situation continues to worsen. The most important thing you can do right now is protect your assets in my opinion. As Yale professor and Morgan Stanley Non-Executive Chairman (whatever the heck that is) Stephan Roach said on CNBC recently "I've seen repeatedly, categorical denials from the president on down of no danger of a double dip. It's ludicrous to talk about no danger of a double dip in a weak post-crisis recovery. You've got to be alert for that possibility."

Read more: Morgan Stanley™s Roach: Ignoring Double Dip Risk Is Ludicrous  

Not only is it a possibility, but we think it is almost unavoidable. As Barry Ritholtz says in his headline in the Washington Post on Sunday:

The trend is your friend - until that nasty bend at the end!

ECONOMIC CALENDAR:                                                   
Tuesday - New Home Sales                              
Wednesday -Durable Goods Orders, EIA Petroleum Status Report
Thursday - Jobless Claims                                        
Friday - GDP, Consumer Sentiment, Ben Bernanke Speaks at 10:00AM Eastern