Caution is the Key Word
In This Uncertain Market

And you thought the credit crisis was over?

Like most investors, I'm delighted when markets rise -- even when I can't figure out why. Until last week, that's how I was feeling. Since the market bottomed on Aug. 16, in the midst of a credit meltdown and market turmoil, it soared to new highs. It was as if Federal Reserve Chairman Ben Bernanke had pulled out a magic wand, waved it to produce a half-point rate cut, and poof! The credit crisis was gone.

Then came Friday's 366.94-point decline in the Dow Jones Industrial Average, which ended the week down over 4%.

Meanwhile, mortgage defaults -- the problem at the heart of the credit crisis -- have continued to soar. Thornburg Mortgage, the mortgage REIT whose fortunes I've followed closely in this column, reported a $1 billion loss and suspended its dividend, sending its stock tumbling.

For further evidence of the continuing deterioration in credit markets, look no further than last week's earnings from J.P. Morgan Chase & Co., Citigroup and Bank of America. It says something when J.P. Morgan's Jamie Dimon is hailed for managing to offset $1.3 billion in write-downs with $1 billion in private equity and other gains; overall profits rose 2%.

Citigroup, where profits fell an alarming 57%, wrote off $1.56 billion in collateralized loan obligations. And Bank of America reported a stunning 93% drop in investment-banking income, to $100 million. Earnings were down 32%, missing analysts' estimates. (I was among the disappointed, since I own Bank of America shares.)

And these earnings are necessarily backward-looking. It's still too soon to know how the continuing deterioration in housing and mortgage markets will affect future banking profits. Will the recent deal-making frenzy continue? Will the private-equity boom roll on? Maybe. Then again, maybe not.

As I've said before, I don't expect much visibility in the mortgage market before the end of the year at the earliest. The latest developments once again underscore that this is a slow-moving crisis. It cannot be resolved with a few write-downs and a rate cut or two. Many traders can live with anything but uncertainty. Yet uncertainty is our fate for the immediate future.

So what does this mean to individual investors? Here's my take:

• Don't fall prey to sharp swings in market sentiment. Stick to a disciplined, long-term approach.
• Don't try to bottom-fish in mortgage and housing markets. It's too early.
• Don't chase yield. Junk bonds remain especially precarious, in my view. Short- and medium-term certificates of deposit still offer attractive yields, are government-insured and pose little risk to capital.

I'm not in the camp predicting recession. Generally overlooked in Caterpillar's earnings report last week was its glowing account of overseas growth. The global economy still looks terrific.

But there are times to be cautious. With so many unknowns lurking within the financial system, this appears to be one of them.

--James B. Stewart, a columnist for SmartMoney magazine and SmartMoney.com, writes weekly about his personal investing strategy. Unlike Dow Jones reporters, he may have positions in the stocks he writes about. For his past columns, see: www.smartmoney.com/commonsense.

Email your comments to rjeditor@dowjones.com.