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I dig quite a few post holes. In fact, on a consistent and ongoing basis, I might dig more post holes than any other investment advisor in the country. It seems like my yard always has fence that needs to be put up or repaired. For example, a few weeks ago a windstorm blew over a 50-foot section of board fence and snapped three posts off at ground level. I also have a small section of pasture that I need to finish fencing before winter and it will require about 15 more post holes.

I know what to expect when I am digging a post hole. The ground on my property has heavy clay soil and lots of rocks–many of them quite large. It is about the worst combination one could encounter for digging post holes. The holes are all dug by hand using a shovel and a heavy digging bar. Once in awhile I’ll hit a section of sandy soil with very few rocks, but that is quite rare. I can normally count on two to three large rocks per hole and dozens of smaller rocks. Most holes take about 45 minutes to dig. I can only do four or five in a session before I get too worn out and have to switch to a less strenuous activity.

Just as experience has taught me what to expect when digging post holes, two decades of market watching have given me a pretty good feel of what to expect when investing. I certainly don’t mean I can predict what stocks will do tomorrow or the exact level of the S&P 500 two months from today. But I know that the indices will fluctuate from day to day and week to week as part of their normal pattern of movement. The fact that major indices have been down for a few sessions is no more unusual than me finding a rock when I am digging a post hole.

I’m always surprised by people who are emotionally connected to these short-term market movements. They are despondent on days when stocks are down and euphoric on days when the market advances. One market pundit I read has been warning his subscribers for months about an imminent major bear market. A couple of weeks ago he finally advised his readers to close out their short positions. Now, based on just a couple days of downturn, he is again advising them to buy short funds.

The chart above is similar to the one I included last week. The black line shows the daily price activity of the Nasdaq. The gold line is a simple 50-day moving average. Notice that since bottoming in mid-July, the Nasdaq has had a steep rally. The sharpest portion of that advance was the last three weeks of August. It is normal for the market to correct after such a move. In fact, it would not be surprising to see the Nasdaq drop all the way back to its 50-day MA before resuming its advance. There is no reason to fret or worry about this latest move unless the Nasdaq drops below that level.

The next meeting of the Federal Open Market Committee is Sept. 20. Wall Street traders and corporate America are nervous about what the Fed will do with interest rates at that gathering. Between now and then, the market will decline every time a report shows economic strength and rise with each report showing weakness. My own opinion is that the Fed’s decision in August to hold interest rates stable after 17 consecutive increases means it is highly unlikely that Fed officials would raise rates again now. Fed officials tend to act deliberately. They understand that changes in interest rates take months of show up in the economy. I think there have been enough signs of economic slowdown that they will hold the line for the rest of 2006.

Of course, it is possible that something unexpected could happen. Occasionally while digging a post hole I’ll hit a rock that is too big and I end up having to move the hole or make it bigger. When that happens it might take two hours to finish one hole. But such instances are rare. And as far as the markets go, the chance for a major meltdown like we saw in 2000 seems very remote. Right now the economy is still strong. Unemployment is low. Inflation seems fairly under control. The price of oil is falling. Technical and cyclical indicators for stocks are generally strong right now. There is really nothing to indicate that the recent few days of weakness are anything more than a normal consolidation after a rally.

Have a great weekend. Feel free to come help me dig a hole or two.
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