1. Widespread fear and pessimism - You can't find a Bull on Wall Street to save your life. Practically everybody in Bearish and feels it's "obvious" that the market has to go down. Well, the market never does what "everybody" thinks. There's an old saying on Wall Street - "If it's obvious, it's obviously wrong!"
2. The Government Bailout is essentially a giant stimulus package - Like it or not, the amount of liquidity that is about to enter the economy is enormous and it will bump the economy significantly.
3. The news is still bad - the market is a barometer for the future, generally 9-18 months out. Stocks tend to bottom and rally while the news is still bleak, well in advance of good news, leaving most individual investors in the dust. As much as it hurts, investors have to get in while the news is still bad.
Where the low for this market is nobody knows, but it looks like we may have to re-test the lows before we can have a strong bounce. 8200 on the Dow is a strong support level, if that breaks we'd likely see the 7800 level that we saw on October 10th. It's most likely too late to sell as it should bounce very quickly and strongly when it does, and many people who sold will end up getting back in higher than where they got out.
What does the election mean?
The long term outlook based on the election may surprise you. Since 1926, the S&P 500 has performed better under a Democrats than Republicans - 66.0% vs. 44.7% total return or 6.7% vs. 4.6% annual return. Small stocks did even better, with 8.2% vs. -3.5%. Hopefully that will hold true once again.
For now, if you're a news junkie, fasten your seat belt and keep the Pepto-Bismol close by. Otherwise, go out and have some fun. The sun will continue to come up each day.
Give me a call with any comments or questions.
Below is an excerpt from the HS Dent Newsletter.
The market has violated every
technical rule in the book and will likely continue to given the forced
and panic selling from hedge funds.
What we have here is the $2 trillion hedge fund industry blowing up
and melting down after leveraging money as much as 30:1. That is
why the selling is so irrational and persistent. This crisis began with
the slowdown in housing, but its real cause was a new class of
mortgage (CMO) and debt-backed (CDO securities that were rated
AAA by the rating agencies, then leveraged heavily by hedge funds
and investment firms to take advantage of their "quality" and low
volatility, then insured through credit default swaps (CDS) that
were unregulated (and hence had questionable assets backing
them), and then those CDS derivatives were traded and leveraged
growing to a massive market of $60 trillion dollars. Almost no one
saw this coming as the securities that underlay this whole leverage
scheme were AAA rated. But they shouldn't have been and now the
whole financial system is melting down.
Many indices from the S&P 500 to the Nasdaq to the EEM (emerging
markets) have made new lows, although the Dow held above its
10/10 lows of 7,882. The Nikkei in Japan fell below its 2003 lows
before rallying. Hopefully we have a seen a bottom for months to
come and we continue to rally towards 12,000 or so well into 2009.
If we rally to the most likely near term target of 10,000 - 10,100,
that could represent the 4th wave of a broader A-wave that could
see a final bottom closer to 7,000 if there is bad news ahead on the
economy, or more bank crises. The strongest support for U.S.
stocks is the 7,200 - 7,400 area where the 1998, 2002 and 2003
bottoms occurred. There was also a minor low in late 1997 close to
7,000, so the range is 7,000 - 7,400 for very strong support.
All of the sharp rallies thus far have merely
been short squeezes, which was typical in the 1929 - 1932 crash. For
now, there is a better chance that we have seen the lows for now and we
get a continued, but choppy rally for months ahead.
The irrational panic selling in the stock market is not coming as
much from normal investors and mutual fund managers as in the
early 2000s. It is coming from highly leveraged hedge funds that
are incurring huge losses and redemptions which forces them to
sell all of their good stocks as well to get liquid.
If the market does end up bottoming on 10/10 at 7,882
on the Dow, then an eventual recovery
from an increasingly successful Treasury plan will be the
likely scenario. And then inflation pressures, rising
interest rates and commodity prices will be very likely
and ultimately defeat such a rally. The stock market
could advance more to 12,000 - 13,200 in that scenario
and into spring or even summer (March - September).
That will give investors a chance to sell stocks at more
attractive prices and to unload real estate in a slightly
better market, as real estate won't rebound for many years!