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In this article
Alan Greenspan speaks from Asia…
The Dow takes back roughly 15% every eight months or so.
The rising trend has been broken, and risk has raised its ugly head.

On Monday, we heard from Alan Greenspan, speaking from Asia as to how the economy is due for a tumble. And on Tuesday, a market collapse comes roaring out of Asia like a latter-day tsunami, and sweeps round the world to wash 4% off the American market.

Is Sir Alan truly that good? Or perhaps that scary?

Naaah. The fact of the matter is that this retracement has been due for weeks. And what's more, it isn't over yet.

Blue Chip Stock Investing: The Dow Industrials takes back what is due

Any decent student of the markets can tell you that the Dow takes back roughly 15% every eight months or so. And yet, every seven months, we hear that this time it's different.

This time everything is just right -- valuations are just right, the number of sticky eyeballs is just right, the real estate market is just right -- and the market really can climb a ladder to the moon this time around. And they are always shocked and appalled when the wave comes and knocks down their ladders. And they want a fall guy, someone other than themselves to blame for their predicament.

Today, quite conveniently, the current Fed Chairman, Ben Bernanke, was due to speak on Capitol Hill anyway, so that such nonsense as subpoenas was rendered unnecessary. And when he got there, more than one legislator asked the one question that was sure to be on the minds of the folks who can replace them in a heartbeat: “WHAT HAPPENED TO ALL THAT MONEY?”

Blue Chip Stock Investing: Is China to Blame?

Mr. Bernanke did his darnedest to quietly and concisely answer their questions:

Is it broken? No, the markets appear to be “working well.”

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Did you, or perhaps China, (anyone but us!) do something wrong? No one should take any blame here: “There didn't seem to be any single trigger of the market correction.”

Can you even tell us what actually happened? “I don't think it would be useful for me to try to parse the movement into the components associated with different pieces of news or pieces of information.”

Blue Chip Stock Investing: How Far Will the Dow Drop?

Is this the end of the bull run? Is the economy going to turn now and bite the market on the rear (much as his predecessor warned on Monday)?

Nonsense, everything is just right: “My view is that taking all the new data into account, there is really no material change in our expectations for the U.S. economy since I last reported to Congress a couple weeks ago. If the housing sector begins to stabilize and if some of the inventory corrections that are still going on in manufacturing begin to be completed, there's a reasonable possibility that we'll see some strengthening of the economy sometime during the middle of the year.”

“Maybe,” “perhaps” and “if we are lucky” seem to be the operating concepts here. Don't do anything rash may actually be good advice. The market is indeed actually recovering a fair amount of what was lost. But “don't do anything at all” is a bad idea.

Blue Chip Stock Investing: The Trend Is Broken

Today is different in one crucial way: the rising trend has been broken, and risk has raised its ugly head. The market must now search downward for a new firm floor.

Over the next few weeks, all should adjust their portfolios accordingly, by devoting an increased portion of cash to defensive tactics. It is time to add put contracts to your array of call contracts.

Or choose antithetical stocks that will benefit for a failing economy. Or at least tighten up your stops and prepare to eat some minor losses.

Indeed, it may be months or possibly even years before everyone forgets again and truly believes that everything is just right.

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Related Resources
Market Prices: Current prices on the Dow Jones Industrials. - Yahoo!Finance
The Federal Reserve: Chairman Ben S. Bernanke's Testimony before the House Committee on the Budget.