Tuesday Market update

I think the worst news of the day was the inability of the broad market indexes to hold above their November lows, as the DJIA, S&P 500, NYSE, Wilshire 5000 and the Russell 2000 have all now broken long-term support, removing any claim the bulls might have that the market is making a long-term bottom.

The inability of the S&P 500 to hold above 741 and the Wilshire 5000 to hold above 7340, changes the equation. It wasn’t close either, as we clearly closed well below support today with the S&P 500 closing at 700 and the Wilshire 5000 at 7113.

Of course, this doesn’t mean the stock market can’t rally but the technical damage of today has removed any notions of the most basic concept of a technical foundation, a higher low.

If you are holding on, hoping for a recovery, the worst thing we can see is a lower low on the broad market indexes, which argues for a continuous of the downtrend as the market probes for a new market bottom, wherever that might be.

A staggering $61.7 billion in quarterly losses at insurer American International Group Inc. (AIG) touched off fresh fears about the health of the nation's financial system. This is the largest loss in corporate history, crushing any hopes that things might be stabilizing.

Even Warren Buffet now admits that he made a “major mistake” in recommending buying stocks in the last quarter of 2008.

Buffet said the economy will be “in shambles” this year, and perhaps longer, before recovering from the reckless lending that caused the worst “freefall” he ever saw in the financial system.

On Saturday, Warren Buffett’s holding company, Berkshire Hathaway, finally released its numbers, which showed that it had the largest decline in book value in its history. Ouch $50 billion!

Investors all over the world are coming to the realization that risk needs to be managed. The notion of long-term investing is becoming more and more of a risk, especially for the retired, where digging such a big hole as we have seen this last year can take two decades to break even. As an investor, you must protect portfolio and cut little losers before they become huge losses.

Adding to downside pressure was a $4.61 cent drop in crude oil prices, which hammered the energy sector today on increasing doubts that energy demand will recover, given a battered economy. Crude oil failed to penetrate above its weekly middle Bollinger Band line and looks increasingly vulnerable to the next intermediate-term down leg.

We are now left with the question of how low can the stock market go? With the S&P 500 closing at 700, the S&P 500 P/E ratio is now at 12 times earnings. If P/E ratios follow historical troughs we could be looking at P/E ratios of 5X to 8X earnings. That would put the S&P 500 somewhere at around 300 to 500. That’s a lot of downside risk! Check out this article.

We can no longer rule out a continuing collapse before a recovery advance is seen. This is now a very real possibility, something inconceivable a year ago.