U.S. stocks slumped for a second day, hammered by the biggest drop in retail sales in three years and growing doubt that plans to bail out banks will keep the nation out of a prolonged recession:
``The state of the economy is weighing heavily on investors' minds,'' said Lawrence Creatura, a fund manager at Clover Capital Management in Rochester, New York, which oversees $2.7 billion. ``This has so far been largely a Wall Street problem, but it's starting to cross over to Main Street and the data today supports that.''...``A big chunk of our economy is in recession right now,'' said Tom Wirth, senior investment officer at Chemung Canal Trust Co. in Elmira, New York, which manages $1.5 billion. ``There's fear the Christmas season is going to be miserable.''
Almost immediately after the market’s historic rebound Monday, investors began to dread the inevitable: a so-called “test” of the previous lows, an occurrence that generally follows just about all massive selloffs. But the idea of a “test” is one that’s easily misinterpreted. For a variety of reasons, stocks don’t move in straight lines, but this does not mean that the major indexes do not have to descend to the previous levels reached in order for investors to conclude that a test has taken place. “Some people think it has to go right back to the low, but it could be shallow, or deep, or a lower low,” says Phil Roth, chief technical strategist at Miller Tabak. “At this point, a test started yesterday. How deep it’s going to be, I don’t have the answer to that yet.” Friday, the Standard & Poor’s 500-stock index bottomed out at 839.80, and the Dow industrials hit a low of 7882.51, before both indexes recovered to close out the session. William Gibson, managing director of research at Nollenberger Capital Markets, says he’s looking for the half-way point between Tuesday’s high and Friday’s low — which comes to 942.06 on the S&P — as a harbinger that a “test is underway.”What happens from there is anyone’s guess. History provides only a modicum of comfort here. In 1987, following Black Monday, the subsequent selloff held about 10% above the low, which would translate to about 8670 on the Dow this time, according to Marc Pado, chief investment strategist at Cantor Fitzgerald. The halfway point between the recent low and the bounce following would be about 8838, which Mr. Pado believes is an optimistic, but valid projection based on the massive rescue effort and the cash raised by funds for redemptions. After the 1929 crash, the activity that followed was worse. The market crashed in October, made a lower low in November, recovered for five months after that, and then went down for two years. In 1962, the market rallied sharply from a low in May and then dropped again, falling to a lower low in June. Obviously, not all of the movement can be attributed to technical factors — the policy response in 2008 has been much stronger than in 1929, Mr. Roth notes. In addition, the point at which the selling crescendo occurs can also contribute to whether the market falls further later on. The 1929 crash started that period’s bear market, while the 1987 crash was basically a bear market in and of itself. This time, the process is further along, but the market get a “rebuilding noted by declining volume and volatility, and emotion comes out of the market — and then people will be saying, ‘Now, what about the recession?‘” Mr. Roth says.
But the idea of a “test” is one that’s easily misinterpreted. For a variety of reasons, stocks don’t move in straight lines, but this does not mean that the major indexes do not have to descend to the previous levels reached in order for investors to conclude that a test has taken place.
“Some people think it has to go right back to the low, but it could be shallow, or deep, or a lower low,” says Phil Roth, chief technical strategist at Miller Tabak. “At this point, a test started yesterday. How deep it’s going to be, I don’t have the answer to that yet.”
What happens from there is anyone’s guess. History provides only a modicum of comfort here. In 1987, following Black Monday, the subsequent selloff held about 10% above the low, which would translate to about 8670 on the Dow this time, according to Marc Pado, chief investment strategist at Cantor Fitzgerald. The halfway point between the recent low and the bounce following would be about 8838, which Mr. Pado believes is an optimistic, but valid projection based on the massive rescue effort and the cash raised by funds for redemptions.
After the 1929 crash, the activity that followed was worse. The market crashed in October, made a lower low in November, recovered for five months after that, and then went down for two years. In 1962, the market rallied sharply from a low in May and then dropped again, falling to a lower low in June. Obviously, not all of the movement can be attributed to technical factors — the policy response in 2008 has been much stronger than in 1929, Mr. Roth notes.
In addition, the point at which the selling crescendo occurs can also contribute to whether the market falls further later on. The 1929 crash started that period’s bear market, while the 1987 crash was basically a bear market in and of itself. This time, the process is further along, but the market get a “rebuilding noted by declining volume and volatility, and emotion comes out of the market — and then people will be saying, ‘Now, what about the recession?‘” Mr. Roth says.
Having seen this plenty of times on individual stocks, please let me explain what "retesting the lows" means. When markets gap up in an explosive rally following a long down period, like they did on Monday, we see profit taking and then prices go back to "fill the gap" opening of that day.
Check out the 5 day chart on the Dow. You can see what "retesting the lows" means. This happens often in markets and individual stocks after an explosive rally (that is why you shouldn't rush to buy after explosive moves up!!!).
It isn't necessarily a bad thing: if the 8500 levels hold on the Dow, we can grind back up and possibly test the 50 and 200 day moving averages in the following weeks and months ahead.
Of course, in these jittery markets, investors might throw in the towel and just start selling indiscriminately again.
I do not think this will be the case. Why? Because hedge funds, stock mutual funds and pension funds do not want to kill the market. They need a bounce from these levels going into year-end. 2009 is another story, but from here, I expect us to grind higher.
The Dow plunged 733 points to close at 8,578 today. If you look at these historic prices, you see we opened at 8,462 on Monday after reaching intra-day lows of 7,773 last Friday and closing last week at 8,841.
In the next few days, my "vested interests" theory will be put to the test. If we do not hold these levels, watch out below, it will get very ugly.
Leo Kolivakis
Pension Pulse
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