01/18/08 1:33 pm: The S&P 500 continues to get clobbered. This is the worst start of the year in decades. In my last post, I posited that the market would probably retest its spike lows for the summer, but unfortunately, it failed this test, taking out not only the summer lows, but closing well below the lows formed in early 2007.
A weekly chart (see above) reveals a worrisome technical picture:
- the intermediate term and longterm uptrend lines have been decisively violated;
- a breakout attempt (as noted last post) has failed;
- an attempt to hold the spike lows then make a new high failed, causing the market to collapse well shy of its past highs;
- the market has had multiple days in which it closed down over 1% with much of the selling coming in the final hours of trading;
- the volume on declining days or weeks (shown here) has been very high, much higher than on up days.
The fundamental backdrop remains horrible, with the dollar in free fall, many signs the consumer is tapped out and pulling back on spending, and continued unwinding of the mortgage market and real estate bubble. At a household and government level, we are spending more than we are taking in, running huge deficits to buy things today we can't really afford until tomorrow, if then. Iraq continues to drain us of national blood and treasure; instead of honestly paying, we continue to live with the fiction that tax cuts and the deficits they have created don't matter. Well, they do, and as Johnson and Nixon found out (the most analogous period I can think of), you can't have a war in Asia prosecuted in the face of international condemnation without expecting some payback, not just political. Our dollar, then as now, lost an enormous amount of spending power and we suffered horrible stagflation. 1973-4 was one of the worst years for the stock market, a year that also saw the demise of an intensely unpopular, once popular, Republican President.
All the solutions being tossed around are missing the point: an economy based 70% on consumption of things we don't really need by people who can't really afford them, financed by people whose main interest is generating fees and shunting the liability to someone else is not sustainable in the long term. Just as we went through much pain as we transitioned from a manufacturing to a technology based economy, I imagine we will go through much pain as we move away from an America-centric, carbon-based economy to whatever the next phase of the game will be.
Stay tuned. The possibility of a sharp, snap-back rally, maybe one that gets everyone to sigh a breath of relief and say, Thank God that's over, is high, but don't believe it until the charts tell you it is.
How to play this market? Consider hedging your long positions with puts, although they have become more expensive. Sell down to your sleeping point, dumping any speculative plays. If you love a stock and think it will turn around, why not sell it, then immediately turn around and put a buy stop in place above its recent relative highs? If the stock continues to decline, you can move down your stop to an even lower price. If it it rallies immediately, the most you have given up is a few points of gain. It allows you to sleep better and for me is great, cheap insurance. With ETFs and tax-deferred accounts, you can move hundreds of thousands of dollars with the click of a mouse for negligible transaction costs. Anyone with a moderate portfolio exposed to stocks has lost the equivalent of a new car since the start of the year; wouldn't a $14.95 commission be worth avoiding too much further carnage?
Don't try to guess a bottom here. In fact, prepare yourself psychologically to buy back whatever you are selling at a higher price. That's OK. If the stock surges 100% over the next 5 years, who cares if you gave up 2 or 3 or even 10% in an attempt to limit some of your losses?
Stay tuned....
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