After the Fall, a Measure of Reason

Professional advice from around the Internet says don't panicand stick to your investing plan

No one knows how this market mystery will unfold: Will July 26 and 27 go down as a two-day rumble or will stocks keep creeping lower?

Equities were ripe for a pullback, market pros say, and warning signs about woes in housing and the mortgage market have been building for weeks, if not months. Barry Ritholtz at The Big Picture says the drop on July 27 was all about credit—essentially, investors don't want to get stuck owning any yucky debt that could blow up. As a result, two of the market's big drivers, share buybacks and LBOs, "are now kaput," he says. "What is occurring is a full-blown repricing of the liquidity spigot slowly turning off," Ritholtz concludes.

Roger Nusbaum at Random Roger's Big Picture agrees. The news about the delay in the sale of $12 billion in Chrysler debt reminded him of the 1989 unraveling of the LBO of United Airlines' parent because the financing fell apart, causing a mini crash in the U.S. stock market. "The turning off of the financing spigot, regardless of the details, is a threat to stock prices," Nusbaum says.

Also suffering from some late '80s flashbacks, evoking Michael Milken and even the 21 Club, was Eric Fox at Stock Market Prognosticator. Though the 1989 crash still haunts many investors, he seems to have some hope that it won't be repeated: "Wall Street is notorious for having a selective memory, so maybe the buy-on-the-dips investor will drive things back up."

Remain Calm

Perhaps. In the meantime, what should investors do? "By this point, both fatigue and stress have set in, and we all have to protect ourselves from making emotionally based trades as a result—and look to take advantage of those we can identify," says Charles Kirk at The Kirk Report.

Some pros, like Sam Stovall, chief investment strategist at Standard & Poor's Equity Research (MHP), think this pullback has created a chance to buy certain stocks. For those seeking defensive plays, Jon Ogg at 24/7 Wall St. offers a list of companies "that are at least perceived to have a sort of 'quality premium' and lack of credit risks to their models," including Coca-Cola (KO), Procter & Gamble (PG), and Anheuser-Busch (BUD)—noting on the last one that "if you drink alchohol, you only drink more when things are bad."

What you should not do is panic, says Jeffrey Kleintop, chief market strategist at Boston's LPL Financial Services via e-mail. His "Five Reasons Not to Panic" include "it's just another 5-7% pullback, the temporary unwinding of the yen carry trade is nearly over, profit worries are overblown, subprime losses are unlikely to cause a financial crisis, and no one will be left to sell." Keep in mind that "volatility is back," he says.

And don't let a few down days throw you off. "It is days like today why I prattle on so much about picking an exit strategy ahead of time before you might be emotional so all you need to do is stick to your plan, whatever that may be," writes Roger Nusbaum. "If you are disciplined over and over you will add value to your returns over the long term even if you don't manage this situation exactly right." In this very jittery and uncertain market, staying calm is ultimately the best thing to do.

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