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Anorexic Equities

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And I still look for a Dow below 10k before the end of 2008. – aftermath (10/2)

Only five days ago, as most market analysts looked for enactment of bailout legislation to reverse the precipitous drop that the previous Monday’s rejection of the bill by the House had been blamed for causing, as many market analysts decided that we had seen that elusive market floor, as absolutely none of those analysts were mentioning 4-digit Dow levels, only five days ago I reiterated my own conviction that we were headed below 10,000 for the Dow. Yet I do admit that even the pessimist in me did not expect to see that emerge so quickly, so dramatically.

Earlier this year, as I kept lowering my short-term projections without finding any long-term cellar, at one point I did discuss a doomsday scenario whereby too much equity selling would join pension funds’ exit from the markets during too short a period, thereby sending the markets into an uncontrolable tailspin. I never actually thought to see it happen, not in my lifetime, not like it’s been unraveling here.

As indicated by this chart drawn from Google Finance, we’ve had a wild ride down since hitting historical highs a year ago. After pulling back late in 2007 and through early 2008, the progression of the lines I’ve drawn on this chart convinced many a technical analyst that we were headed back to the record high, then beyond, to a 15k Dow and higher. At the circle I’ve drawn on the chart, when nobody else at all on the air was calling for a lower market, I said I didn’t believe it, calling 13k the ceiling for anytime in the near future. Since then, I’ve extended that pessimistic projection downward through disruptions in the oil and other commodity markets, through hurricanes and the emerging presidential campaign, through all the turmoil in the credit markets, and past this recent legislative “solution.” So many analysts who just don’t get it talk as though all the selling ought to have dried up by now? Not with pension plans lined up to take out at least another $100 billion before leveling out, and not with all the scared 401(k) investors now joining those pension plans running like hell from Wall Street. And with nothing coming on board from the economy, from the government, or from anywhere else to change the direction of the market, I still don’t see the bottom. It might be going down faster than I expected it to, but it still hasn’t found the turn that will take it no lower.

We haven’t lost a dime through it all. So convinced was I that we had seen the highs a year ago, I went to 0% equity allocation on our own investments just over a year ago, near the peak. Early in 2008 after the initial decline, I was tempted to push a little bit back into the market, but felt that any such investment would be short-term, a month or two at most, then gave up on the notion entirely when I saw the 13k ceiling. So have remained at 0% equities through this entire decline. I did anticipate that a 4-digit Dow would get me into a bargain-hunting frame of mind once again; but so far, I’m still on the sidelines, since a further drop of 20% or more from current levels would not surprise me in the least.

The stock market is acting like a classical anorexic. No floor ever remains intact. They will set a new level to drop to, then from that floor find another lower one that needs to be reached. So too Wall Street. Only when it gets down to the bone might it finally decide to put some fat back on.

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Written by macheide

7 October 2008 at 3:52 pm

Posted in calls & puts

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