Something You Never Want to See as an Investor

Feb 23, 2009: 10:22 PM CST

You’ve read the headlines – turn away if you like – but the Dow Jones closed today at a level not seen since 1997, as price broke and closed beneath the 2002 index value low of 7,197.  Let’s see the carnage on the charts.

Dow Jones Monthly Chart:

Today’s closing low of 7,114 – and the intraday low of 7,105 – breached the 2002 bear market low and sent the index down to a 12-year low.  The same occurred on the S&P 500, though technically the S&P 500 missed making a fresh closing low by a mere 2 points.  It also closed beneath the 2002 bear market low, but technically the 741 intraday level set in November 2008 still holds… by a fraction (the S&P closed today at 743, with an intraday low of 742).

Let’s not get caught up in technicalities, though.  It means that investors have been devastated in the bear market plunge that began in October 2007.  Investors who bought stocks or mutual funds beginning in 1998 are officially underwater in their long-term investments (though dividends have helped).

Should February 2009 end on a negative note (close), then that would mark the 6th month in a row the Dow Jones Index declined on a closing basis.  We’re certainly due some sort of rally, but those buying into that belief have been hurt so far.

The old saying goes “In a bear market, you’re either short or out.”

Investor anxiety and panic may be setting in, and people have caught on now that odds favor lower prices.  However, bear markets end when everyone is convinced that prices will keep going down forever, and they end when everyone is bearish and has sold out of most/all positions (leaving no one left to sell).

There’s not much support left if we can’t hold these levels.  There is no more recent chart support (the last being the November lows which still are in tact for the NASDAQ and Russell 2000), but should all indexes break these levels, then we’ll have to go to Fibonacci Price Extensions off higher-level swings for forms of possible support.

The other saying goes “In bear markets, there is no floor (or support).”

I know – old sayings do nothing for those who have lost money in this environment, but experience is the best teacher.

Be meticulously careful out there.

Corey Rosenbloom
Afraid to Trade.com

12 Comments

12 Responses to “Something You Never Want to See as an Investor”

  1. blues Says:

    “everyone is bearish and has sold out of most/all positions (leaving no one left to sell).” But then that would mean SPX goes to ZERO, LEAVING NO ONE LEFT TO SELL… because there will be NOTHING LEFT TO SELL…. no?

  2. blues Says:

    By the way, if TA means anything, the double top we are witnessing in both SPX and DJI means the target on both are somewhere BELOW ZERO?! 🙂 THE END of US of A as we know it? Collapse of America? And collapse of the world? Market goes to ZERO because it predict of WW III?!

  3. Corey Rosenbloom Says:

    Blues,

    No – that’s not how it works 🙂 Mutual funds are required to be in stocks (but investors are not required to hold mutual funds) and pension funds – to an extent – are required to hold stocks/investments/bonds, etc so it doesn’t mean when every last person sells, but when generally all who *want* to sell have sold. That’s the way it always works. It’s supply and demand. Supply will dry-up and demand will take over.

  4. Corey Rosenbloom Says:

    Ha – no! It doens’t work that way either.

    TA has no mechanism to predict a major Index to 0 – that just doesn’t make sense.

    Most S&P targets I’m seeing – be it Fibonacci or whatever – target the 650 range with the lowest target I’ve seen going to 450. I know of no credible forecast that takes us beneath 500.

    By the way, wars often mark *bottoms* of stock markets, not tops. The 2003 bottom formed almost to the day the Iraq War began.

  5. MARKETBHAVISHYA Says:

    Just see forecast for DOW /S&P 500 its not updated.

  6. MARKETBHAVISHYA Says:

    Just see forecast for DOW /S&P 500 its not updated.
    http://www.marketbhavishya.com/stock.htm

  7. MARKETBHAVISHYA Says:

    Just see forecast for DOW /S&P 500 its now updated…..!!!
    http://www.marketbhavishya.com/stock.htm

  8. maximus Says:

    http://4best4worst.wordpress.com/

    check out the first link — calling for 23 year depression with lows on Dow of 3000-3500 (need to click another link in the article for the 44 page detailed analysis.

    guess this is the strongest support below? guy has called many other big moves (’87, Japan, etc)

    just thought it might be useful to some of your readers

    Maximus

  9. Kevin Says:

    Obviously Corey and those he quotes are speaking rhetorically. Experience teaches us that bear markets tend not to end until bull opinion have been driven out of the mainstream, and mainstream trader bulls have been driven out of most/all bullish positions.

  10. NotAfraidofTrend Says:

    If a bear market implies bad economy, it hurts every one, including those who profit by shorting the market.

    Should profiteering in the face of a destroyed market, i.e. economy, be permissible even in a “free” economy?

    But if government intervention becomes a necessity, how “free” is the economy, really?

    I know many people do not attribute market declines to short sellers, but, as a robust market is everyone’s interest, do short sellers contribute to a robust market?

  11. Corey Rosenbloom Says:

    Kevin,

    True – it’s generally when main street has sold all the can/are willing/are able to sell, which is often (ironically or not) at the point of maximum pain when people believe the bear will last for the foreseeable future.

    But that point often is a capitulation point, though bottoms still take a process to form.

  12. Corey Rosenbloom Says:

    NotAfraid,

    Yes – all are hurt from a bad economy, but some may be more savvy or able to weather it than others. Experienced active traders may have a better chance than most, simply because they can pull their funds, avoiding the decline or can profit from it – though this probably applies to fewer people than we might think.

    Hmm – that’s a debate that could go on for days. Down markets are just a part of the business/economic/market cycle as up-markets – they just are a reality.

    Regarding the free economy, that’s also a fascinating discussion.

    Short-selling helps provide liquidity and has its place in a market. After all, how many short-squeezes have there been? One may attribute declines to short-sellers but remember that every short-seller is a buyer-to-be (to close the position). That’s often why you see the biggest gains of the beginning of a bull market. It’s not necessarily because everyone’s so optimistic and bullish – it’s partly because shorts are scrambling to cover.

    All and all, it’s just reality and our job first is to protect our own capital and then seek to make a profit… which may include shorting/buying inverse funds. After all, being invested or trying to pick bottoms in 2008 proved quite damaging.