Stocks: After Dow 7,000, What Next?by
Investors don't lack ways to measure the carnage on Wall Street. What they're missing is a way to calculate when the losses will stop.
In falling markets, technical analysts look to stock market history for points where buyers might jump back into the game. These so-called support levels are places where, at least in theory, stock market momentum should slow or shift.
The 7,000 level for the Dow Jones industrial average is a nice round number, but it definitely wasn't a support level. On Mar. 2, the Dow blasted through 7,000, dropping almost 300 points, or 4.24%, to 6,763.29.
SEEKING PREVIOUS LOWS
Rather than a round number, a more commonly cited support level is a previous market low. As the market tumbled last fall, technicians looked back at the lows of the bear market in the early 2000s. In 2002 and 2003, major indexes repeatedly hit and then bounced off the same support level—about 7,500 for the Dow and about 800 for the broad Standard & Poor's 500-stock index.
Yet those support levels were no match for the financial crisis as it worsened. On Nov. 20, the Dow closed at 7,392.27 and the S&P 500 closed at 752.44, wiping out a decade's worth of stock market gains.
Here, stock market technicians seemed to have a new support level. Stocks rallied in late November and December off these lows. Even when the market faltered, buyers seemed to keep indexes above these seemingly rock-bottom lows.
Then, in late February, the floor fell out: By Mar. 2, the Dow was trading at levels not seen since 1997.
A wide variety of technicians and investing experts say they no longer see any support under the market:
"We're largely in uncharted territory," says Richard Sparks of Schaeffer's Investment Research. Technicians would need to look back to 1996 or 1997 for appropriate support levels—and few traders or investors are looking back that far.
"If you're 40 years old, that's probably when you started investing," says Dave Rovelli, managing director of equity trading at Canaccord Adams. The bottom line, he says: "We've taken out every major support level on the Dow."
Uri Landesman of ING Investment Management (ING) says he agrees. "Right now we're just in a freefall," he says. Major indexes have "broken through every level of support in the last five years. That's one of many things that is scaring people."
WEIGHING THE NUMBERS
Without support levels, investors still search for numerical signals of when the selling might stop. One can look at the duration and the size of losses in previous bear markets, for example.
So far, the S&P 500 is down 55% from its peak close of 1,565 on Oct. 9, 2007. The Dow has dropped 52% from its peak on the same day. If you measure from those October highs, the current bear market has lasted almost 16 months.
An analysis by Sam Stovall of Standard & Poor's is discouraging for those who hope the declines just can't reasonably get any worse—or last much longer—than this.
The 15 bear markets since 1929 have lasted an average of more than 18 months and lost investors a median of 34%. However, for "mega-meltdowns"—where indexes fell more than 40%—the average drop was 51% and the bear market lasted more than two years.
Between 1929 and 1932, the S&P 500 fell 86%. The 1938 to 1942 bear market lasted 42 months.
"WORST OF ALL"
"When this bear market is finally over, nothing says it couldn't have experienced the worst of all levels," Stovall wrote in a Mar. 2 note.
So, technical levels offer little support to the falling market, while models from history are mostly discouraging to market bulls. If you're wondering when the market stops its slide, you're probably better off examining the state of the economy, the conditions in the credit market, and the economic policies coming out of Washington.
Still, numbers can be psychologically significant for traders.
Chris Johnson, of Johnson Research Group, notes that "with very little to go on," round numbers—like 7,000 for the Dow or 700 for the S&P 500—take on much more significance.
Several traders and technicians said the Dow's dipping below 7,000 meant relatively little to them. With just 30 stocks, the Dow isn't as closely watched by professional investors as the broad S&P 500.
A CRUCIAL LEVEL
But, says John Wilson, chief technical strategist at Morgan Keegan, "The Dow still gets plenty of publicity." Now below 6,800, the Dow is the lead item on radio and TV market updates, so it's well known to the broader investing public.
"The big thing is now you've got a "six" in front of the number," Sparks says. "That's going to be shocking [and] it may be more significant to the public at large." In other words, an already gloomy American public has another piece of bad news.
For professional investors, Johnson predicts the 700 level on the S&P 500 will be crucial. If the S&P falls below 700, that "is going to bring on another wave of selling," he says.
Stock pros often say that "selling begets more selling." Investors looking to slow this market's momentum toward the downside can put little stock in numerical milestones. This bear market's steady and deep declines suggest hope must come from somewhere else—from the real economy or credit conditions, for example—if the selling is to stop.