Market Update: 2008-11-19

On October 22, 2008, I penned the following: "I still think that the stock market is ripe for a relief rally, and I anticipate it could rally by 20-30% by early January. But I don't expect the rally to be anything more than a sucker's rally." Well, we had that rally, and we have since lost it all. Suckers!

Yep, between the intraday low on 10/27 and the intraday high on 11/4, the S&P 500 rallied 23%. Even if you just look at the closing levels on those two days, the rally was a nice 18.5%. Now all of those gains are gone. But that outcome was expected.

Now the question that everyone is asking is "Have we bottomed? Did we successfully test the October low this past week?" And now for my answer...drum roll, please..."No!"

Although it is (not so) possible that we have already bottomed, I still believe the odds are that the S&P 500 will drop to 800 or below.  The October 2002 low on the index was in the 770s, and this schizophrenic market is most likely not going to let this bear go until we test that multi-year low. Of course, as of October 27 the index fell to 818 intraday, which is really darn close.

One of my biggest concerns is that the banking sector now appears to be totally breaking down. Call it capitulation or what you will, but it doesn't look good! Over the last week or so, the BKX banking index has been testing its July intraday low of 46. I first saw signs of trouble last week when two of the three largest US banks, Citigroup (C) and Bank of America (BAC), broke below their previous lows even though the BKX was still holding up above 46. My gut feeling was that both BAC and C were getting ready to pull the rest of the banks down with them (misery loves company), and as of yesterday and this morning, it looks like that is finally happening. Yesterday the BKX closed at a new low of 45.68, and now this morning it is continuing to spiral down another 5.5% to 43.15 as I write. The problem is, if this trend holds and we do break support, then I don't see much support below. There is "Support Lite" in the low 40s, but after that there is absolutely no support until you reach the upper 20s to 30. If the BKX were to fall to 30, that means that banks could lose another 30% of their current depressed values.

Banks and financials in general still contribute a nice chuck of change to the S&P 500 portfolio. So if they continue to fall as looks likely, then news lows in the S&P 500 are going to be easy to accomplish. This morning US markets are once again testing keys support levels. The Nasdaq is making new lows this week. Banks are in need of life support. Homebuilders are going up in flames. Oh, and did I mention, we are in recession! And it is getting deeper! At this point, I think we are not that far away from seeing the S&P 500 under 800. Once we get there, I will reevaluate the situation and write again. It will be very interesting too, because then the question will be, "Will the S&P 500 hold support and bottom around 775-800? Or will it break the lows of 2002 and go off into the abyss?"

We will no more later.  Until then, I am buying the S&P 500 (i.e., S&P 500 index fund or SPY) once a week to ensure that I accumulate stocks while they are searching for the bottom. I plan to do this for the next 6 months by steadingly unwiding my cash position into the market in weekly, equal amounts (aka dollar-cost averaging in). I most likely won't be able to find the exact bottom, but I will be sure to buy as many shares as possible now that we are substantially closer to the bottom than we are from the top! I am not buying banks or homebuilders right now, but am holding on to the shares that I still own in those sectors. And oh yeah, Happy Investing!

Gregory