Market Commentary:
Early today I felt that I had underestimated the significance of a worse-than-expected GDP number. If you remember, yesterday I said that I suspected that today’s revised GDP for Q4 2008 was probably a discounted statistic that should not spur further selling.
I was wrong – and I was right.
Apparently the economy was not just stalled for most of Q4 but was actually in reverse most of the time. According to the Commerce Department, the GDP fell at a 6.2% seasonally adjusted annualized pace in the final three months of 2008, revised from the initial estimate of a 3.8% - making it the worst decline since a 6.4% decrease in the first quarter of 1982.
Stocks sold off hard on the open but quickly gained a footing and rallied into positive territory by mid day. Some late day nervous selling took stocks back down to close moderately in the red but most of them well above the early lows of the day.
The DOW was down 1.6%, the S&P 500 was down 2.3% (near its lows), the Russell 2000 was down 1%, and the Wilshire 5000 was down 1.9% for the day.
The bad news today was not just that the revised GDP reflected a much weaker economy than anyone had suspected last year, it was that another index broke through the November lows.
I was watching television just before work as the S&P 500 initially sold down to its low of the day, 734.52. If you remember, the low for November last year was 741.02.
I watched the monitor closely as the S&P 500 broke down through this low and then immediately shot up, never to hit it again throughout the day – until selling in the last 15 minutes of trading took it back near the lows of the day.
Earlier in the day it was as though buyers were lined up for purchasing once the November lows were hit. And then possibly out of nervousness, the S&P traders got out at the end - ahead of the weekend.
Perhaps it was the secret “Plunge Protection Team” doing their part to lend stability to the markets to keep them from plunging below the November lows. Or perhaps it was just another technical test of the lows to see it support will really hold.
That is why I want to discuss the Dow Jones Wilshire 5000 index today. Let’s see if the broadest of market monitors has also broken the lows of last year.
The Wilshire 5000 index is the most comprehensive of all market indexes, in essence virtually all of the publicly traded stocks in the United States.
The low for the Wilshire 5000 last November was 7340. Today the Wilshire 5000 low was 7447, or about +1.5% above the November low. With the Wilshire 5000 closing today at 7474, it ends the month at +1.8% above the November lows.
While there is little margin to brag about, it is safe to say that the majority of the stock market has not broken below the November lows of last year, let alone the 2002 lows or going back 12 years to 1997 as much of the media is pronouncing.
The 2002 lows for the Wilshire 5000 are at 7273 – today’s close puts it +2.8% above the 2002 low.
And if you take the big cap stocks out of the picture by looking at the Wilshire 4500 index (basically the Wilshire 5000 without the S&P 500 stocks) you get an even more interesting perspective.
The 2008 November low for the Wilshire 4500 is 292. Today’s closing price for the Wilshire 4500 was 321, or +9.9% above the November low. The bottom line is that if you take out all the large cap stocks and the sick financials that are in them, the rest of the market can still fall almost 10% before breaking below the November lows.
Unfortunately, I do not have data for the Wilshire 4500 back to 2002, but my napkin calculations suggest that the broader market without the S&P 500 stocks could fall 12-15% before actually breaking below the 2002 lows.
The broken lows for the DOW and now the S&P 500 are mostly because of the financial beating that has been applied to the financial stocks. If the financial stocks have essentially been beaten to death, then perhaps a look at the broader market measure, i.e., the Wilshire 5000 is a better indicator of the test for support.
Don’t get me wrong here. I am not a crazy bull. If you have been following me you know I have been about as bearish as one can get. That is why my clients have either protected their portfolios or have actually made money in this bear market.
But to simply declare that the 2008 lows have been broken and the 2002 lows have been broken is much like shouting “fire, fire” in an attempt to get the crowds out of the building. And all the time maybe there really is only a hot plate of bank stocks in somebody’s microwave that feels like they are on fire.
Let’s not exit the building until we are sure of the facts. A mass exodus from the stock market at this point would be very foreboding, suggesting that even the first leg down of this bear market may not have been reached yet, that the reprieve in December and early January was not a bear market correction but just a pause in the first leg down.
It could also mean that this bear market, which is already tagged as one of the worst ever, could easily become so.
So from a completely technical basis, once again, most of the stock market has not breached the 2008 lows or the 2002 lows – though the DOW and the S&P 500 have recently done so. (Check out the charts at the end of this update.)
But the margin left to work with is more than slim – so thin it is almost transparent.
For obvious reasons, I am hoping the markets hold here. The alternative is too depressing. And yet I remain a realist, too.
So remain defensive.
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