Tuesday, March 3, 2009

Stocks: After Dow 7,000, What Next?

Stocks: After Dow 7,000, What Next?

Investors don't lack ways to measure the carnage on Wall Street. What they're missing is a way to calculate when the losses will stop.

In falling markets, technical analysts look to stock market history for points where buyers might jump back into the game. These so-called support levels are places where, at least in theory, stock market momentum should slow or shift.

The 7,000 level for the Dow Jones industrial average is a nice round number, but it definitely wasn't a support level. On Mar. 2, the Dow blasted through 7,000, dropping almost 300 points, or 4.24%, to 6,763.29.


Rather than a round number, a more commonly cited support level is a previous market low. As the market tumbled last fall, technicians looked back at the lows of the bear market in the early 2000s. In 2002 and 2003, major indexes repeatedly hit and then bounced off the same support level—about 7,500 for the Dow and about 800 for the broad Standard & Poor's 500-stock index.

Yet those support levels were no match for the financial crisis as it worsened. On Nov. 20, the Dow closed at 7,392.27 and the S&P 500 closed at 752.44, wiping out a decade's worth of stock market gains.

Here, stock market technicians seemed to have a new support level. Stocks rallied in late November and December off these lows. Even when the market faltered, buyers seemed to keep indexes above these seemingly rock-bottom lows.


Then, in late February, the floor fell out: By Mar. 2, the Dow was trading at levels not seen since 1997.

A wide variety of technicians and investing experts say they no longer see any support under the market:

"We're largely in uncharted territory," says Richard Sparks of Schaeffer's Investment Research. Technicians would need to look back to 1996 or 1997 for appropriate support levels—and few traders or investors are looking back that far.

"If you're 40 years old, that's probably when you started investing," says Dave Rovelli, managing director of equity trading at Canaccord Adams. The bottom line, he says: "We've taken out every major support level on the Dow."

Uri Landesman of ING Investment Management (ING) says he agrees. "Right now we're just in a freefall," he says. Major indexes have "broken through every level of support in the last five years. That's one of many things that is scaring people."


Without support levels, investors still search for numerical signals of when the selling might stop. One can look at the duration and the size of losses in previous bear markets, for example.

So far, the S&P 500 is down 55% from its peak close of 1,565 on Oct. 9, 2007. The Dow has dropped 52% from its peak on the same day. If you measure from those October highs, the current bear market has lasted almost 16 months.

An analysis by Sam Stovall of Standard & Poor's is discouraging for those who hope the declines just can't reasonably get any worse—or last much longer—than this.

The 15 bear markets since 1929 have lasted an average of more than 18 months and lost investors a median of 34%. However, for "mega-meltdowns"—where indexes fell more than 40%—the average drop was 51% and the bear market lasted more than two years.

Between 1929 and 1932, the S&P 500 fell 86%. The 1938 to 1942 bear market lasted 42 months.

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