CHESSNOID

The US stock markets tumbled for a third day in a row due to bad financial headlines and increasing prices of crude which is approached the $108 barrel mark. Wow! $4.00 gallon gas seems like it will be here tomorrow, which could mean $5.00 gallon gas before summer. If any of this comes to fruition, then look for a tighter squeeze on our economy.

The sub prime debacle keeps appearing in different companies’ bottom lines and pushing them to the red side. Banks, mortgage companies, investment houses, builders, insurance companies, and many more other types of companies I just can’t think of right now. When you read all the blogs out there about the bubble bust, they seem more accurate than many economist and analyst forecasts. We are in a mild recession getting pushed hard into a severe recession. All this because of the housing boom that lasted almost 6 years caused by artificial rate cuts has come to an end. The federal reserve is trying to reverse the momentum by cutting interest rates and increasing auction amounts to the banks. So far the only thing the rate cut has accomplished is pushing up the prices in many commodities with crude oil leading the pack. As far the liquidity from increasing the auctions, I think that gave investors temporary confidence in a fading market.

One of the many problems spooking the market comes from the financial sector. If you follow the reset charts for mortgage arms, they actually begin to reach their peak this year. Many banks are much more into this sub prime mess and are spoon feeding the market the bad news to avoid a major panic. Every quarter, they say they are putting $10-$20 billion aside to offset the future losses. Then the next quarter comes, and the banks and other financial institutions start singing the same story but increase the dollar figures in the next verse. These companies are not being upfront about the losses they have now and the future losses they are headed for. These last news articles about financial institutions getting margin calls for millions of dollars is very telling of how this market’s trend continues to point down. Everyone is hoping this will be the last quarter we hear of the subprime debacle, but unfortunately this may just be the beginning. According to Forbes:

Banks are busy reducing leverage and shoring up their capital, and the effects of both are cascading through the financial markets. Hedge funds and mortgage lenders are faltering on margin calls by skittish lenders. Banks aren’t picking up the slack in demand in the auction rate market. Borrowing terms for even the most creditworthy of companies and individuals are getting more onerous.

Estimates about the magnitude of the financial system’s losses keep going up. Last week, UBS (nyse: UBS - news - people ) put it at $600 billion. On Friday, a team of analysts from Friedman Billings Ramsey said the financial industry needed to raise $1 trillion in permanent capital.

The major stock markets fell from the bad news:

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I did pretty good today in my imaginary stock market account at Updown.com. Email me if you want a referral sent to you. My portfolio shot up from the excessive selling and I sold everything to lock in the gains except for one gold ETF which finished slightly down. This is definitely not the way I had previously invested before. This is the most interactive I have become in the stock market. Another reason I sold was the market does seem oversold and should bounce up tomorrow. I waited for the last 10 minutes before closing before executing the trades. I think the best way to do this is actually put sell orders in so they automatically execute at predetermined amounts which will eliminate the emotional part of the trade. I still believe the market is in a downtrend but the charts will zig zag up and down. The most important thing I am learning is to lock in gains and avoid losses. There were a few days I let my investments ride and it seemed to hurt me more than help me. I will probably buy more of the same ETFs that I have purchased when the market bounces and sell again when it is oversold. The same principle of buy low and sell high still apply.

One thing I have definitely noticed about this way of investing is because it isn’t real money I am less inclined to feel bad about losing it. Real money would have made me too cautious. I am hoping to be able to adopt this method in real trades in the future. If I had a million dollars, I guess I wouldn’t be participating in this mock stock market.