What a Week: More Pain, No Bottom In Sight

To get a sense of how wild and dramatic the swings on Wall Street have been this week, think about this: It was just one week ago that Warren Buffett said "buy stocks."

Buffett, known as the "Oracle of Omaha," was very specific about not calling a short-term bottom, which is fortunate considering the Dow fell 5.4% this week, while the S&P lost 6.8%, and the Nasdaq tumbled 9.3%.

Wild Swings, But No Crash

While the overall trend was certainly down, the market didn't move in a straight line. Amid reports of forced selling by hedge funds, the wild swings created nerve-wracking and gut-wrenching action - for pros and retail investors alike.

Seemingly anything can and did happen this week, although fears of an outright crash on Friday proved misplaced. The Dow fell more than 300 points but that felt relatively tame, which tells you something about how dramatic the recent weeks have been.  

We Have Not Hit Bottom

Although many industry observers are waiting for a bottoming out of the markets, there’s no way to know what’s next. Many traders believe the market will go back to its lows of 2002 – around Dow 7400 – before this decline ends.

Another way to tell a bottom is near: When people stop asking "what should I buy?" and start wondering "what should I sell?" - or just tune out the market altogether.

So although it’s stressful to watch your 401(k) bob up and down, patience remains the order of the day for those who are truly in it for the long haul.

"Watch and wait for a more constructive market," is the advice from one trader. "We continue to do little [trading]. Anything can happen here. There's no blueprint [and] everybody's guessing."

Week In Review

Here's a recap:

• Monday: Buffett's public display of optimism, and similar comments from other market seers, helped produce big gains. The Dow jumped 413 points as stress in the credit markets eased and talk of more government stimulus encouraged buyers. But Monday's rally proved to be the exception in yet another week where the sellers ruled.
• Tuesday: The Dow gave back about half of Monday's gains as traders focused on corporate earnings in the "weaker than expected" column from a number of players, including Caterpillar, Texas Instruments, Lockheed Martin, Freeport-McMoRan.
• Wednesday: Tuesday's slide proved to be a mere warm-up as the Dow lost 514 points, the S&P tumbled 6.1% and the Nasdaq shed 4.8%. The across-the-board decline was triggered by general concern about a global recession and specific worries about emerging markets like Argentina and Pakistan. Such macro concerns overshadowed earnings and guidance from, among others, Apple and Yahoo!
• Thursday: was in some the week's most dramatic, and confusing, session: The Dow traded in a 550-point range and swung wildly before closing up 2%. The S&P also rallied but the Nasdaq fell even as Amazon.com overcame a big early decline to close higher, despite its very cautious guidance.

Your Tax Dollars At Work 

Congressional hearings on the crisis provided background music to this week's market gyrations. Wednesday brought a focus on the failure of rating agencies while Thursday's session with former regulators featured an extremely rare event: Alan Greenspan admitted mistakes were made.

While the dog and pony show played on in Congress, current government regulators here and abroad continued to take action to try and stem the decline, including:

• A $540 billion pledge by the Fed to bolster money market funds.
• $7.7 billion of government support, via the Treasury's TARP plan, for PNC's acquisition of National City.
• Reports Treasury may take stakes in insurance companies, much as it did last week with the nation's biggest banks. (Insurers like MetLife and Hartford Financial were big winners Friday on the news.)
• The IMF is preparing financial aid for Iceland, Hungary and the Ukraine.
• Korea's government pledged $130 billion to shore up its banks.

"More [government] action right now is akin to trying to stitch a throat wound with razor blades," is how one trader summed up the government's response.

A grim image for sure, but somehow appropriate for a market that keeps getting bloodier.

What to Watch For Next Week

The Fed is scheduled to meet Oct. 29 and rumors of a half-point rate cut are currently making headlines. Recent history has shown the government's preference to take action over the weekend, so investors and analysts will be watching closely even before U.S. markets open on Monday.