On Thin Ice

Another week, another 4.5% drop in the S&P500.  According to Barron’s, the S&P’s 2009 performance, to date, is the fifth worst start since 1927.  Not a good sign.

What changed this week?  Not the data–we witnessed the same parade of bad economic news that’s been  streaming out since the late November market lows were hit.  This week, retail sales, initial claims, core CPI, industrial production and the Fed’s Beige Book all painted the same, dreary picture:  the economy is bad and getting worse.

So nothing concrete has changed.  Simply put, investor and trader sentiment became more bearish.  As expected, consensus aggregate earnings estimates are rapidly coming down, to $65-$75, and could easily be lowered more.  And without better signals that the economy and earnings will rebound at the end of 2009, the markets ought to push down the multiple assigned to these earnings. 

Still, today’s price level, already lowered from 930 to 850, is assuming a reasonably strong rebound at the end of 2009.   Perhaps traders are beginning to lower the odds of a rebound?  At least, they’re not blindly jumping on the Obama hope bandwagon throwing all caution into the wind. 

After a lot of focus on the fundamentals, economic and corporate, over the past few weeks, what can the technicals tell us?  Interestingly, on Bloomberg’s home page last week, two long time technicians (John Murphy and Ralph Acampora) outlined the downside risks.  Many traders think of the November 2008 lows as a critical test level–a level roughly equal to the lows of the 2002-2003 bear market bottom.  Traders expect the market to approach these levels sometime in 2009.  The point:  if the market breaks through these lows decisively, then the next stop will be much lower–close to 600 on the S&P.  From a technical point of view, once these support levels get broken, there’s no strong support level near the break point.  Technical traders would have to look back to levels in the mid-1990’s to find the next rung on the ladder.

Coincidentally, a low 600’s S&P reading would fit neatly with a low $60’s S&P earnings  figure and a 10x multiple–earnings and and a multiple one would expect in a situation where the Obama-led fiscal stimulus doesn’t generate the hoped-for recovery in the hoped-for end of 2009 time frame. 

Cross your fingers!

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