Monday, February 23, 2009

The Sinking, Stinking S&P 500

The drumbeat of bad news and frightened investors continued unabated on Monday, after the government and Citigroup discussed plans to increase the level of US government ownership in the once-giant financial firm to as much as 40%.

Oddly enough, Citi was one of just two stocks on the Dow 30 to finish the day with gains. Odd, because on Friday, the White House issued a statement expressing that "banks in private hands" was their preference, which stabilized rapidly falling stocks, especially those of Citi and Bank of America (BAC), the other Dow issue which finished the day on the upside.

27 other Dow issues finished in the red on Monday; General Motors (GM) was unchanged at 1.77. The gains on the two banking stocks were minimal. Citigroup (C) ended the day up 0.19, to 2.14, while Bank of America gained 0.12, closing at 3.91.

While two of the largest US banks grappled with insolvency issues, the real story was witnessing the S&P 500 fall below the November 20 support level at 752.44. The NYSE Composite also broke through that same November 20 support (4651.21) during the session. Since the Dow broke down last week - and continued in free fall today - that leaves only the lonely NASDAQ as the one major index still above its 2008 bottom (1316.12).

Dow 7,114.78, -250.89 (3.41%)
NASDAQ 1,387.72, -53.51 (3.71%)
S&P 500 743.33, -26.72 (3.47%)
NYSE Composite 4,633.78, -170.73 (3.55%)

The headline numbers were more than sufficiently validated by internals. Losers beat gainers by a massive number, 5471-1183, nearly a 5-1 margin. New lows dominated new highs, 940-12. Regarding the highs-lows, it should be noted that new lows have held sway - on a day-to-day basis - every day for nearly 16 months, except for 5 or 6 instances, according to our own figures.

Volume moderated a bit, as expected, since options expiration was Friday.

NYSE Volume 1,612,611,000
NASDAQ Volume 2,040,330,000

With a dearth of either economic reports of corporate filings, investors had to fly somewhat blind, but even a bat could tell that sentiment was clearly negative, as the economy works through one of the worst recessions of all time.

The NASDAQ, S&P and NYSE Comp. are already off more than 50% from their October, 2007 highs, and the Dow is within 36 points of being exactly half of its all-time closing high of October 9, 2007 (14164.53).

Commodities continued lower as well. Crude oil for April delivery was off $1.59, to $38.44. Gold slipped $7.20, to $995.00. Silver fell 4 cents, to $14.45. The metals were hit by some profit-taking, as they have been on a tear of late, though this pause may not last long before the next leg up occurs.

The shiny stuff may be about the only true safe haven available right now as stocks are simply too risky, though some traders are moving into high-grade (BBB and above) corporate bond issues and munis, on the back of the government's recently-approved stimulus bill.

As far as a bottom in stocks is concerned, there is none in sight, though some idea of the length of the recession may provide a clue. Typically, recessions last 16-24 months, but since this one is anything but typical, it almost certainly run past the long end of that span. Since the downturn began roughly in December, 2007, we may be only 14 months in, meaning that 2009 should pretty much be written off. If the recession lasts 27 months (long by any measure except that of the Great Depression), recovery could begin March 2010.

If the markets begin to move roughly six months prior to the actual economic recovery, then October of this year may be a rough mark for a bottom and a potential time frame to begin nibbling at stocks.

With prices beaten down severely in many sectors, it would not be imprudent to take some calculated risks - especially if you have a long time horizon and ample discretionary funds - sooner. stocks have been hammered so badly, many are beginning to appear downright cheap. Nobody will be blamed for jumping the gun at this level, though only with small caliber bullets.

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