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Let History Be a Lesson: Don't Lose Faith Just Yet

Tuesday, 27 Feb 2007 | 6:58 PM ET

We were in machine hell today. There was selling that seemed to be linked only to more selling. But this isn't the first time we have had this kind of sell-off. We've had two in the last 20 years, and each tells us something about how we should react to today.

History tells us we should be ready to buy after a major down day – maybe not the day after or the day after that, but soon. The last time this happened was 9/11, where the Dow fell 684 points on the first day we opened after the attacks, and there we had a possible end-of-days scenario that made people believe that the system had simply fallen apart.

The second time is more akin to this – the crash of 1987, when the Dow fell 508 points. Of course, a 500-point decline from a 2,000 basis, what happened back then, is much worse than losing 416 points with the Dow over 12,000. Especially when you consider that the week before that crash was the worst week ever.

Now, in both cases you DID NOT get a bottom on the big sell-off day. Cramer says we have to presume that's the case today.

According to Cramer, without recognition from the Fed, we are not done going down. That's why he wants you to be in the protected zone: dividends, buybacks and soft goods. If you're not in the protected zone, he fears that you will be too susceptible to the newfound power of the machines that have risen to wreck your portfolio.

That said, you want to be a buyer, not a seller. Don’t look back on this period with regret! If September 2001 and October 1987 are any indication, three months from now you’ll wish you bought in at this opportunity. To be sure, if this is anything like 1987, we'll find out that some firms were wiped out today. We don't know if they're hedge funds, small brokerages or anything else. And we won't know for days, but get ready for the bad news in the near future.

Bottom line: History tells us to buy after a sell-off like today's, but be patient. We also know not to buy immediately. We haven't hit bottom, if the past is any guide, but we should hit it soon.

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