Friday 17 October 2008

Has the Dow hit the bottom yet? Analysts are divided

After two weeks of triple-digit swings and heavy losses, investors and market watchers are wondering just when the US bear market will hit bottom.

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Has the Dow hit the bottom yet? Analysts are divided

Agence France-Presse in New York
17 October 2008

After two weeks of triple-digit swings and heavy losses, investors and market watchers are wondering just when the US bear market will hit bottom.

Wall Street, which has dropped precipitously in the past two weeks, rapidly erased a rebound on Monday after governments in the United States and Europe announced massive actions to shore up the global financial system.

But on Wednesday recession fears gripped the market, setting off panic selling, including an 11.4 per cent drop in Tokyo.

The Dow Jones Industrial Average posted a 733-point drop, the worst one-day point loss for the blue-chip index since last month’s record 777-point decline and the steepest percentage drop since 1987.

Volatility reigned again on Thursday, but this time the Dow pulled out of steep losses and vaulted 401.35 points [4.68 per cent].

“Historically, there’s very little precedent for what happened in the markets for the last two weeks,” said Marc Pado, analyst at Cantor Fitzgerald.

The Dow Jones Industrial Average of 30 blue-chip stocks has shed 17 per cent in October so far.

“At the time of the 1929 market crash, the markets had fallen more, shedding more than 50 per cent, but that happened over the course of several years, not several weeks,” said Gregori Volokhine at Meeshaert New York.

“For a decline as rapid, you have to go back to 1987” in the US, but the overall correction was shorter and the market lost only roughly 30 per cent, he said.

On Friday, the markets fell to lows last seen in the first half of 2003, with the Dow sliding as low as 7,773.1 points in intraday trade, before staging the powerful comeback rally on Monday.

Since then, global stock markets have retreated on growing fears of a long and deep recession in the US and Europe, and under pressure of asset sales by hedge funds.

But some analysts believe the bear market may be reaching the end of the road.

“We already found a bottom with Friday’s lows even though we could test them again,” said Peter Cardillo, analyst at Alaron Trading.

“This market is off 40 per cent” from its record peak a year ago, he said. “It discounted a lot of things: a severe recession, earnings on the negative side for several quarters – at one point the market begins to look for the bright spot.”

Mace Blicksilver of Marblehead Asset Management also was optimistic: “The market is probably close to a low.”

Mr Volokhine noted that the market is currently in the midst of “one of the biggest corrections of all time, that’s why one is undoubtedly at the lowest low”.

“Many measures have been taken by central banks here and in Europe” to unblock frozen credit markets and that was shoring up the financial system, he noted.

“It’s necessary to give them time to take effect, but it’s difficult to imagine that things are going to continue to get worse given the scale of the interventions” by governments and central banks, Mr Volokhine said.

Alexandre le Drogoff, analyst at Aurel brokerage, took a dimmer view.

“Clearly there is room to fall” on all the international markets, “which have experienced the same pattern of decline since the beginning of the crisis”, in August last year, he said.

“Since last year there has been a major downward wave, interspersed by tiny periods of rebounds,” he said.

A market theory on cyclical declines has “five waves, we’ve only had four so far”.

According to Mr le Drogoff, “the market is going to stabilise above last week’s floors, then fall in the coming weeks to 2003 floors … between 7,200 and 7,400 for the Dow.”

Sherry Cooper, chief economist at BMO Capital Markets, said that the stocks decline “reflects the growing awareness that the US economy is going into a deeper and more protracted recession than expected”.

“The housing and credit bubbles have popped; and now the stock market shock is adding to consumer and business woes,” she said.

Calling the problems “viral”, Ms Cooper said that the financial crisis, “while hopefully diminishing, leaves in its wake a dramatic slowdown in the US and elsewhere. The stock market is reflecting that reality”.