The scary loss of market support

Note: This post has been updated to account for Thursday's close.

I was fairly sure a couple of weeks ago that the market was putting in a bottom. The Standard & Poor's 500 Index told me so.

I was so confident that a bottom was forming that I even commissioned a graphic showing why. Now, I'm worried about how far much farther the market could fall. The S&P 500 tells me so.

Here's why.

My confidence was built on how the S&P 500 behaved after dropping for no more than a minute on Oct. 10 to 839.80. That was the start of a wild day of trading.

The S&P approached 839.80 one more time on Oct. 10, and, between then and Nov. 12, the market tested that low four times, bouncing up each time.

Technical analysts call repeated bounces off a low level the establishment of a support level, which means that the mere act of approaching that level generates new buying. (There are, of course, millions of ways to identify a market bottom -- which is to say, a market bottom shows up when it shows up. Check this set of criteria.)

I, for one, was hoping that support seemed to be forming between 840 and 850 on the S&P. If it kept holding at roughly those levels, then confidence would start to build among investors and, in time, confidence would beget buying. I wasn't alone in watching the market trend after Oct. 10. Check this post on Seeking Alpha. USA Today noted the chatter as well.

I was under no illusions that the formation of a bottom meant stocks would take off again. If all went well, I thought the market would muddle along for, say, six to nine months. And, once the economy started to show real signs of recovery, then stocks might move slowly higher. That's what happened after bear markets in 1973-74, 1981-82 and 1987. After the dot-com bust and the after-effect of the Sept. 2001 terror attacks, the bottom came in October 2002, followed by a major test in March 2003.

Alas, my hopes were shattered quickly.

On Nov. 13, the S&P dropped to 818.91, which was bad but not horrible.

On Wednesday, the support gave way. The S&P 500 closed at 806.58, just above its low on the day at 806.18.

Thursday, the market just seemed to fall apart. The S&P 500 fell to 752.44, which was below its closing and intraday lows in 2002, in the aftermath of the dot-com bust and the Sept. 11, 2001, terror attacks. The index is now down 52% from its October 2007 peak -- the largest percentage decline for the index since it fell 82.4% between March 1930 and June 1932.

Wednesday's was so ugly a fall that Barry Ritholtz, who writes the Big Picture blog, suggested the S&P 500 could drop to, say, 681 before new support formed.

That level is basically where the trend line of the S&P since it peaked in October 2007 intersects with the long-term support line since 1984. That would translate into Dow Jones Industrial Average falling to 7,100 or lower.

"There are deeper levels, but it's too ugly to write now," he added.

Thursday, Ritholtz wrote simply "Ouch!"

These are scary times, really scary times.

What happened? Markets don't operate independently of reality.

Here are the problems.

Bank stocks tanked. Here it looks like Treasury boss Hank Paulson created another problem. He said on Tuesday that the Treasury Department had decided that buying up bad assets from financial institutions was a bad idea -- even though he'd gone to Congress and begged for $700 billion to do just that.

"The sense that policymakers are struggling to get ahead of the markets' woes, and have frequently switched course or backtracked on earlier declarations about what needed to be done, has damaged investor confidence and created even more jitters in the markets," Jane Sasseen wrote on BusinessWeek.com.

She's being polite. So far this week, Citigroup has lost 51% of its value. JPMorgan Chase is down 32%.

The decision of Paulson and Fed Chairman Ben Bernanke to let Lehman Bros. fail in September dried up credit sources for everyone and everything: from General Motors to the young couple looking to take out a mortgage.

Tech stocks have slumped. Concerns have deepened in recent weeks as concerns deepened that business spending on technology will slump. Intel has fallen 8.2% this week; Microsoft is down 12.6%.

Oil and commodity prices are a problem. Slowly, the markets have realized that this will be no ordinary recession. So commodity prices -- and related stocks -- are crumbling. Crude oil fell below $50 for the first time since 2005 and is down 66% from its peaks in July.

Commercial real estate is becoming increasingly stressed. Real estate is throwing us another sucker punch. With retail chains like Linens 'N Things going out of business and cuts coming from other retailers, retail real estate is sagging.  General Growth Properties, the nation's second-largest mall operator, is in such trouble that it has hired bankruptcy counsel. Just in case.

A ton of office space will come on the market in New York, Chicago, Seattle and elsewhere following the collapse of Washington Mutual, Bear Stearns and Lehman Bros. and huge layoffs coming from Citigroup and others.

So, when will a bottom show up?

I offer up Carter Worth's list to watch. Worth is the chief market technician at Oppenheimer Asset Management. He and others at Oppenheimer were beginning to think after Oct. 10 that a bottom might well be forming. He has enough visibility that a number of people will pay attention to him. 

He also wondered which stocks would signal if he was right -- or wrong. He crunched some numbers and, on Nov. 10, came up with a list of 26 stocks that he believed could be used as a "control mechanism" to signal the market's direction. The idea was that it takes a lot of buying pressure to move a stock to a new high and an equal amount of selling pressure to move a stock to a new low.

The group included Citigroup, Bank of America, Internet retailer Amazon.com, search giant Google, chip maker Intel, leather-good producer Coach, and railroad CSX.

Sadly, the list pretty quickly offered a pretty strong signal of what to expect. By Nov. 14, the group was down an average 11.9% from Nov. 7. By Thursday, the declines had widened to an average 29.8%. The best performer of the group, Polycom, was down 13.6%. The worst was Citigroup down nearly 60.2%. One blogger wrote Thursday that Worth's call was "way to soon."

The S&P 500 dropped 6.2% between Nov. 7 and Nov. 14 and finished on Thursday down 19.2% from Nov. 7.

Let's hope the index can find a bottom soon. Or things, which are scary enough, could get really scary.

Here's Carter Worth's list:

Related reading:

Buffett's huge derivatives bet proves costly

Ignore the market until February, expert says

Stocks are cheap, but cheap enough?

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Comments

 

This economy is truly scary.  My parents were products of the great depression and I remember them speaking often of all that took place back then.  To me, I am not an expert, this economy has all the earmarks of another deep depression we are headed for.  Granted it might not last as long as the prior one.  I really hope I am wrong.

Maria V (Posted 11.20.08 1:34 PM) Report Abuse

Charlie -- You would do better in predicting the direction of the stock market by hiring a well qualified medium to conduct some séances.  If you stare at cloud formations long enough you will see chariots in the sky.

Good luck.  

Geoff (Posted 11.20.08 1:36 PM) Report Abuse

I hope your right. but the lack of any real leadership in the banking community or the government, makes me think that this is also a temporary bottom.  The economy is in (waht krugman calls) a depresionary cycle.  I work in construction and although many freinds are out of work it has not hit bottom yet.  I think that the dow will be flirting with 5,000 especially if the US auto makers don't come up with a plan to stave off bankruptcy.  The US has been a house of cards ever since we started importing more than we exported and it has taken 30 years to bring it down, without addressing fundamentals of our economic thinking we will not recover

doug askelson (Posted 11.20.08 1:40 PM) Report Abuse

until they stop saying "confidence" is down and realize that it's not confidence but a lack of actual money people (aka consumers, aka investors, aka the forgotten ones) have to spend.  

Our country - the government, corporations, and the people have been living off credit - you can only do that for so long before your debt to income ratio can no longer sustain our way of life for the last 8 yrs!

I'd love to buy stock and so would all my co-workers - we just do not have enough money to do it - plain and simple.  So much for helping out the upper 1% and it will trickle down!

Anthony (Posted 11.20.08 1:47 PM) Report Abuse

I'm with Doug, the import export thing is key.  The tech boom and the lending boom were hiding a serious problem.  Don't count on a recovery until this gets fixed.

Ted (Posted 11.20.08 1:50 PM) Report Abuse

Well I like the math really gets into history and analyzing the data, but we are NOT living in the same "times" like those of the past. We are in a very different economy - a global economy. Therefore, the analysis should focus on a global scale addressing the flow of goods and services between "key" countires - maybe the G7 using selected businesses to gauage each country's economy and between the G7 countries.

Yes this is scary alright, but as my 86 year old dad and 80 year old mom that lived through the great depresssion say - they were happy with what they had to eat and clothes to wear in a place to stay in their large family (16 and 9 respectively). No one in their family ever went to college and most went as far as grammer school then to whatever job they could find.

MCS

Mike Spinelli, Jr. (Posted 11.20.08 1:54 PM) Report Abuse

come on guys-------let's be real!!!!!!!!! if i had a dollar for each prediction from the Worths and Ritholts of the world I would be able to front the Bail out Package, rescue the "BIG 3", and make all of the banks solvent.

there is no name for this storm and no one, I repeat, no one has any idea where it is really going and what the bottom is. All we do know is that you can be sure that whenever things get a little settled Paulson will ride in, change his mind and belch out more doom and gloom and kill the charge.

I only know one thing for sure, us poor, dumb everyday folks are scared to death.

Don Yuhasz (Posted 11.20.08 1:56 PM) Report Abuse

When Banks became Brokerages, banks started depending on the fed for money to loan. Bank depositors were encourged to buy into the marked and borrow your homes equity. Savings accounts were for kids any adult who saved over a few thousand in a bank savings account was a fool.

Invest in the market the problems of the 30s are behind us. Was it A Rockafelller who took his money from the market just before the deppression  when a janitor asked how a stock was doing that the janitor owned?

THOM (Posted 11.20.08 1:57 PM) Report Abuse

I still think we're a long way off bottom. I hope I'm wrong. Things will be interesting for the next several years at least. Times will be tough.

Michael (Posted 11.20.08 1:58 PM) Report Abuse

With each passing day, I become more and more convinced that Paulson, Bernanke, Obama, Bush, or anyone else in government don't know what the hell they're doing - - - let alone how to right this sinking ship. The sad fact is, none of these numbskulls has a clue what to do. The market works. The market will correct itself. Bailouts won't work. They only delay the inevitable. We're in for a long, deep depression, which will be worsened by higher taxes. Buck up people, this is going to get a lot worse before it gets better.

Joe Schmoe (Posted 11.20.08 2:00 PM) Report Abuse

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