(originally published on January 12, 2008)
We had questioned last week whether 2008 would turn out to be the 'Year of the Bear' in the stock markets considering the lurking full-blown recession in the horizon. We had also concluded that a 50 bps rate cut seemed a certainty at the upcoming FOMC meeting.
The events that unfolded this week confirmed most of our contentions. Sentiments were battered following last week's thrashing. After enduring a nervous session on Monday due to the resurgence of some hostilities with Iran, stocks declined sharply on Tuesday following disappointing pending home sales data and rumors of Countrywide filing for bankruptcy. Stocks, however, rebounded sharply from their intra-day lows on Wednesday driven by an upbeat profit forecast from Dow component Dupont and the stepping down of Bear Stearns bridge-and-golf-playing chief executive Jimmy Cayne. A stronger-than-expected earnings announcement from another Dow component Alcoa and Bernanke's speech hinting towards further aggressive rate cuts lifted spirits up briefly, fueling strong gains on Thursday. The most notable gainer for the day was Countrywide Financial which shot up over 50% in a sudden intraday spike following rumors of Bank of America agreeing to acquire the struggling mortgage lender. The gains were however, short-lived, with stocks resuming their descent on Friday following reports of Merrill Lynch writing down an additional massive $15 billion and American Express increasing its loan loss reserves to cover increased customer defaults.
S&P 500 - Daily
Most stocks ended the week lower - the third straight weekly decline - with majority of the losses witnessed in the higher beta Nasdaq indexes and the small and mid cap laden Russell 2000. The Dow Jones Industrials, S&P 500 and Nasdaq Composite are now well and truly below their summer closing lows.
Dow Jones Industrials - Daily Line Chart
All the frontline indexes are way below their October highs and some are on the verge of breaking down below their entire 2007 trading ranges. In this period, the utilities have expectedly shown a clear out-performance, while the financials have lagged miserably behind.
Comparison of sectoral returns from their respective October 2007 highs
While the S&P 500 is now around 12% from its intra-day highs in October, individual stocks are taking it much harder on the chin. As seen in the chart below, the average stock in the S&P 1500 universe is down over 30% from its 52 week highs, with small cap stocks faring a lot worse than their large cap counterparts.
Average distance from respective 52-week highs for stocks in S&P 1500
The stock market clearly has got off to a bad start in 2008 and the bears are understandably circling the hapless bulls. Already, the Dow Jones Industrials and S&P 500 are down 4.9% and 4.6% respectively YTD while Nasdaq 100 and Russell 2000 are down 8% each. Year of the Bear?? The stock markets are now behaving like a chronic alcoholic who has had frequent unsuccessful visits to Alcoholics Anonymous over the past few months. With time, it becomes increasingly difficult to wean the alcoholic away from his addiction. With time, it has become increasingly difficult for bulls to muster up the strength to stage a recovery. The good news gets discounted instantly, while the bad news is brooded over. In such a scenario, forecasting far out into the year is a tricky exercise indeed. Nevertheless, we look back at some historical statistics, that indicate how January has set the tone for the rest of the year. With earnings season getting busy next week, we also try to figure out what could lie in store on that front. We finally conclude with some Fed-speak that hogged the headlines this week and try to unearth some clues from them.
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