Friday, October 10, 2008

Will Double Digit Crashes Follow Triple Digit Losses?

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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In the last nine trading days the Dow has lost 2271 points or 20.9% of its value. Within this nine days there have been three or four days (depending on your definition) with market crashes. As of yesterday, there have been an unprecedented 6 trading days in a row with triple digit losses. The market meltdown is by no means limited to the U.S., but is global. As bad as the short-term picture is, the long-term could be much worse. Last night in Japan, the Nikkei began testing its 2002 low in a sell off that has lasted 18 years so far. If the U.S. markets follow this pattern, they will not bottom before 2225.

If you define a crash as a closing drop of 5% or more on the major indices, Thursday was the third crash day in less than two weeks (it was the fourth, if you just consider intraday drops). In an unusual trading pattern, the Dow and S&P were down more than the Nasdaq. This was caused by the SEC lifting the short selling ban on financials, which included Dow stocks GE and GM, and of which the Nasdaq has few. While the Nasdaq dropped 95 points or 5.5% to 1645, the Dow dropped 679 points or 7.3% to 8579 and the S&P dropped 75 points or 7.6% to 909. This was the first Dow close below 9000 in five years. The Russell 2000 dropped the most of all, losing 47 points or 8.7%. Trading volume was above average, but not at the spectacular level that indicates a wash out bottom. The VIX, the volatility index, hit 64.92 - way above its top of 55 in 2002, but still considerably below the historic 150 high during the 1987 crash.

As bad as it was in the U.S., worse things happened in overseas markets. The Nikkei dropped 1042 points or 11.4% to close at 8115. Drops greater than 8% took place in Australia, Hong Kong, India, the Philippines and Singapore. Indonesia closed its markets and suspended trading indefinitely. Russia did the same - again. Austria closed it market for half a day when stocks dropped 10% on the open. The major European indices were down 5% to 8% in mid-day trading. Light sweet crude fell below $82, but gold and silver both held up in the drop.

Markets don't go down forever and an explosive bounce will be taking place some time soon. Today, the Dow decisively broke its 200-month moving average (around 8470) on the open. Nasdaq and the S&P 500 broke this level several days ago. While a test of the 2002 lows for the S&P 500 and the Dow is now likely, Nasdaq may fare a little better. Look for support for the Dow around 7200/7300, S&P around 800, and Nasdaq around 1500. While it looks like we could be getting there today, market bottoms on Fridays are an unusual event.

NEXT: Do the Markets Indicate a Depression?

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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