May 6th was a brutal day on Wall Street. It was brutal because the plunge on the Dow we witnessed appears to have been caused by a trading glitch that set off a wave of additional trades accelerating the decline.

Another factor in addition to the actions of financial engineers and traders that caused both individual and professional investors to sell was emotions. What can I say? Years of evidence show that those who have the courage to maintain a calm approach to chaotic events can come through any upheaval in fine shape.

We’ve been talking about a potential market correction several weeks now on the radio show but the bottom line is that a firm commitment to common sense and discipline is vital in today’s financial environment. Those blindsided by emotions will go broke.

This is monumentally important to investors.

If you can, take advantage of the bargains while keeping your psychological seat belt fastened. These are interesting times we’re living in but that doesn’t mean it should be tough for everyone. For the highly aware, it’s a golden opportunity.

- Roland

Yahoo Finance – Based on past history of bear markets, [Ken] Fisher says the current rally is only about 50% done in terms of duration, although the steepest part of the advance has probably already occurred.

In sum, he believes in the V-shaped recovery – for the stock market: “The beginnings of bear markets are about fundamentals.  The back part [is] nothing but panic,” Fisher says.  “The rate of descent on the downside actually gives you the rate of ascent on the upside.  It’s an almost perfect V [and] that ‘V’ runs for fully a year, always.”

That’s encouraging news for those who feel like it’s too late to get in on the rally…

Additional Recommended Viewing:  Brian Wesbury offers a similar argument that we are still in a V-shaped recovery. 

Click here to watch this excellent video analysis from economist Brian Wesbury.

(Total Viewing Time:  6:32)

TIME– The VIX has been making headlines.  No, not the rock band or the cold remedy but the Chicago Board Options Exchange (CBOE) Volatility Index, or VIX, which has been on a wild ride over the past year.  The stock market crash set this indicator of volatility soaring above 80 – for perspective, the VIX has historically averaged around 20. 

The VIX attempts to predict the volatility of the S&P 500 index over the next 30 trading days using options data from the index’s 500 underlying stocks.

What is next for the VIX?  That all depends on investors’ fear of a further decline in stock prices.  Remember:  even if the VIX continues to fall, that does not mean that high volatility for stocks is finished.  Investors should still hope for volatility, realized from a recovering rally.  But a low VIX – signaling reduced uncertainty – would likely signal a coming rally, rather than stagnation in prices.

We’re still a long way from the halcyon days of yore – remember, the VIX long term average is half of today’s level – but investors at least seem to once again believe that day will follow night.  And that’s good news. 

In order to prosper in your financial life and get through this economic environment with the greatest peace of mind, you must rid yourself of any short-sighted thinking that may negatively impact your financial life. 

Every major downturn has its own unique characteristics.  This frightens investors into making the wrong decision at the wrong time.  For example, over the past 18 months I’ve witnessed investors dump their stock market holdings regardless of how well-managed the companies might be.  

A classic short-sighted decision.    

“But Roland,” you say. “Shouldn’t you move more of your money over to cash until you know the market recovery has arrived?  Isn’t that the safe thing to do for now.”

Nope, and here’s why:  For 95 years now the Federal Reserve has destroyed the buying power of our dollars.  With the massive amount of money that’s been created in recent months, I expect inflation to continue being the dominant, long-term trend throughout my lifetime. 

Cash is the LAST place I want my long term savings to be.  For more on this see my previous posts on derivatives. 

Knowledgeable investors I know realize that putting money in the bank today that could buy a loaf of bread will one day be given back those same dollars but this time they will only buy a few crumbs after inflation has taken its share.   

See, there is a difference between money and wealth.  Money is just the tool society uses to measure and trade wealth.  The true wealth: businesses, stocks, land, real estate, and precious metals cannot be created without limit; money can. 

My suggestion is that you recognize the difference between the two and if you have not done so already, start dipping a toe into the market by taking money and buy up the abundance of wealth that so many of your peers are ignoring. 

Here’s one last bit of common sense that explains why now is not the time for cash:

FINAL NOTE: I could be wrong but the chance we saw the market bottom back in the early part of March grows by the day.  Don’t get too excited yet because the windbags in Washington could quickly change that with a speech or a new piece of legislation.  But please stay tuned - the remainder of the year will likely be filled with many twists and turns.  

From CATO – Treasury Secretary Tim Geithner seemed to go from zero to hero in one day when the stock market soared on March 23, ostensibly because of his latest plan to help banks unload illiquid securities of uncertain worth.  The Wall Street Journal headline shouted, “Toxic-Asset Plan Sends Stocks Soaring.”

But homebuilder stocks jumped as much as bank stocks, suggesting the same day’s news about a 5.1% jump in existing-home sales deserves much of the credit.  Any remaining credit should go to Fed Chairman Ben Bernanke, not Geithner. 

The rally in financial stocks began after Ben Bernanke’s March 11 speech to the Council on Foreign Relations.  He came out strongly against the nationalization of banks and admitted that the bookkeeping problems of many banks are largely an artifact of foolish federal regulations.  Bernanke said, “capital standards, accounting rules and other regulations have made the financial sector excessively procyclical.”

Until recent headlines gave Geithner undue credit for a one-day rally, the administration officials had correctly insisted such daily moves could be misleading.  Weekly stock market moves, however, are not so easy to brush off.  The administration must learn to respect sustained market reactions to its policy proposals because the loss of stockholder wealth has had a devastation effect on consumers, banks and businesses.

Since last September, the federal government has justified numerous costly and heavy-handed programs by claiming each new intervention would help the banks and restore confidence to financial markets.  The only objective measure of success or failure is the market value of financial stocks.  By that standard, government solutions have been the biggest problems. 

Video used with permission of WOWT Channel 6. 

Stocks just had one of the worst months since the 1930s and economic data was ugly, too.  Real gross domestic product was revised down sharply for the fourth quarter of 2008, home sales fell further, business investment was weak and unemployment claims jumped again. 

First quarter GDP, so far, doesn’t look any better than it did in the fourth quarter.  Yet, there are signs that the primary cause of the recession – a sudden and sharp decline in the velocity of money – is starting to reverse, so that it will eventually pave the way for recovery later this year.

Usually stocks move up before a recovery begins, so what’s going on?  Are stocks saying that there is no recovery on the horizon or are they saying something else?  We hear two common explanations.  First, some say the Fed’s monetary policy is too tight.  And second, policies coming from Washington, D.C., are certainly damaging to the economy.

So where do we go from here?  Is the market in a free-fall that will never end?  We don’t think so.  With money easy and velocity stabilizing, recent declines in stocks are most likely a reaction to intrusive fiscal policy.  The good news is that these policies, while negative, are unlikely to harm the economy dramatically until 2010 or later.  With the potential for a change in mark-to-market accounting rising and easy money in place, we are still looking for a sharp rally in stocks this year, just like the U.S. experienced in 1975-1976 despite stagflationary policy mistakes.

From Brian Wesbury and Bob Stein at Forbes.com

The below charts are referenced in the video (click for a larger image):