Thursday, October 16, 2008

So Much for That Rally

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Yesterday, U.S. Markets returned to the level of last Friday's close, with the big rally gains of Monday being wiped out after only two trading days. If you measure a crash by a closing drop of 5% or more, it was the fourth market crash day for U.S. stocks in a little over two weeks. The drop started in Europe, with mining stocks and financials being particularly hard hit, but Europe had closed before the worse selling hit the U.S. at the end of its trading day. In Asia, the Japanese and Korean markets were pummeled, but the Hang Seng managed a partial recovery. As bad as things were, no world market could even come close to 77% total meltdown experienced in Iceland when its market was reopened on Tuesday.

Wednesday's trading pattern was somewhat unusual with the S&P 500 dropping more than the Nasdaq and much more than the Dow -the S&P is filled with both financial and energy stocks (light sweet crude dropped to $74.54 during the day and fell even further to $72.66 in Asian trading). While the Dow lost 7.9% or 733 points, the Nasdaq was down 8.5% or 151 points, the S&P fell 9.0% or 90 points. Only the Russell 2000 was off more, falling 9.5% (also representing a change, until recently small caps were outperforming big caps). The Dow broke 9000 again to close at 8578, although the S&P held above the 900 level to close at 908 and Nasdaq hasn't yet returned to the 1500s, closing at 1628. While at least one major news outlet reported this was the biggest drop in the U.S. since the 1987 crash (they were presumably taking about the S&P),it was actually only the biggest drop on the Dow since this September 29th.

Asia markets were more mixed than the U.S. The Nikkei in Japan was down over 1000 points again, dropping 11.4% or 1089 points. The close of 8458 was still above the 2002 bottom. Although, Korea dropped 9.3%, the Hang Seng rallied off a greater than 8% drop to close down only 4.8%. Surprisingly, Australia was off just 6.7%. Considering the concentration of natural resource stocks in this market and that miners had started selling down in Europe because of falling demand for commodities from China, this was a relatively good performance. Problems in Asia were followed on Thursday morning with European markets experiencing further selling so that combined with their trading on Wednesday, they experienced similar drops to those that had taken place in the U.S. The Russian market, actually opened for a change, was the worst hit Thursday with an almost 9% drop.

The U.S. markets are testing the lows from last Friday and need to hold at this level if a multi-week or longer rally is to take place. If the lows are broken more than a small amount, the next stop will be the 2002 bottom for the Dow and S&P 500 or around 7200 and 775 respectively and 1500 for the Nasdaq.

NEXT: Dr. Evil and MiniMe Loot the U.S. Treasury

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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