10, 2008 -- The first 10 months of this year have been the worst for US stocks since 1937, 71 years ago. For the European and Asian stock markets, it has been the worst year in history. For commodities it has been the worst since 1956, 52 years ago. The meltdown in values began only 90 days ago. And thus far, there are no certain signs that the hemorrhaging and pain is even close to coming to an end.
The Gang That Cannot Shoot Straight; The White House, The Congress and The Treasury Department did pass a pork laden $700 billion bailout bill designed to shore up the stock and commodity markets and bring about stability and confidence. But the markets viewed the bailout as, “too little, too late” and consequently, stocks and commodities plunged deeper into the red in the opening days of this week. The crisis deepened.
But in a rare coordinated move, the Federal Reserve and other major central banks from around the world slashed interest rates to prevent a total global economic meltdown. The Fed lowered rates from 2 percent to 1.5 per cent and other nations sliced rates by ¼ to ½ per cent. The coordinated rate cut was the first time central banks acted in unison to lower rates since the terrorist attacks on the US in September, 2001. Janice Dorn, M.D., Ph. D., is a financial psychologist and chief global risk strategist for Ingenieux Wealth Management in Sydney, Australia. Here are her observations in light of the financial collapse seen with stocks. “…this is Market Psychiatry 101. People will sell in panic and in a week or less will be overtaken with regret. Also, those who are trying to pick a bottom will be hurt. The point is that the markets are constructed in such a way as to separate the most money from the most people. They are constructed to inflict the most pain on the most people. This is, in large part due to their inability to understand the psychology of the markets which is no more than their own psychology.”
She also says, “Several signals that I follow are giving buy signals on the DJIA and are close to buy signals on the S&P 500. We don't have an all-clear signal yet, but this looks as much like capitulation as I have seen in some time.” In finance, capitulation means investors and traders are in such a state of panic they are, “throwing out the baby with the bathwater.” Bottoms to markets are formed when capitulation takes place.
But has capitulation actually taken place? Market Watch in an article broadcast yesterday entitled, “Desperately Seeking Capitulation” answers that question by stating, ‘“The Hulbert Stock Newsletter Sentiment Index suggests that though there is plenty of gloom to go around, investors have yet to reach the exhaustion that marks a true capitulation. In fact, Hulbert says that his sentiment index is actually a few percentage points higher than where it stood in early July when the market was trading nearly two thousand points higher than today. As Hulbert puts it, contrarians believe that investors will have to become far more bearish before an enduring bear market bottom can be achieved.”
If the Hulbert Index is an accurate gauge of sentiment, it means investors are still more bullish than bearish. They are not yet exhausted mentally or financially. They have yet to throw the baby out with the bathwater. And that of course suggests a meaningful bottom for stocks has not yet been seen.
There is a difference between, “a bottom” and “the bottom.” Certainly, the recent panic selling smacks of capitulation and a bottom of sorts. I am not convinced it smacks of “the bottom.“ But some sort of bottom could have been formed for several reasons. One, the bailout bill passed into law a week ago. Two, the coordinated rate cuts made this week. And three, the meltdown in the value of the Dow when it dropped sharply this afternoon to 7900 and bounced into the close to settle at 8370.
A year ago, when the Dow was at the 14,100 level I projected a bear market to unfold with a downside target of 8000. I did not feel that objective would be achieved until early ‘09, when problems with auto loans, credit cards and corporate debt would begin to surface. Instead, my objective was met this afternoon, far earlier than expected. That is either bullish or bearish depending on how you look at it. I view it as suggesting a bottom of sorts has been seen.
The risk in the marketplace is about to shift to those that are sellers.
Or, those that are short.
This is not the time to be bearish the Dow as a rally off today's low should quickly unfold. Nonetheless, the Dow will remain a ferocious bear until it closes over the 200 day, simple moving average which is around the 10,050 level. A close there or higher will be signify the start of a new bull market. But between now and then, rallies will be sold and sold hard as investors try to recoup losses and move into a cash position.
Not long ago, many in Congress and the White House wanted to place Social Security funds into the stock market. And you wonder why I call them, “The Gang That Cannot Shoot Straight?”
(The information in this article is the opinion of Commodityinsite.com's Jerry Welch and subject to change without notice.)