Monday, February 23, 2009

Dow Breaks Key Support Indicating a Much Lower Low

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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The Dow confirmed a break of major support on Monday. Yesterday's low just under 7106 was over one percent lower than the 7181 intraday low on October 10th, 2002. The index is now back to where it was in 1997. It should now be considered inevitable the the Dow will have to fall to the 5600/5800 range where the next strong chart support exists. Below that, support is around the 4000 level. Even at 4000, the Dow would be in much better shape than it was in the 1930s when it dropped 89%. As of yesterday, the index is down only 50% from its bull market high. When it would get to even 6000 is open to question as well. It still might take awhile.

The market is deteriorating at this point not because economic conditions are bad, but because it doesn't look like there is anybody in charge that will be making them better. While the market was falling apart last Friday, Treasury Secretary Geithner was MIA. Word was that he was on vacation. It is certainly understandable that after a whole four or five weeks in his new job where he managed to royally screw up in record time, that he would need some rest. Besides, he knew that president Obama would soon be busy announcing that he would be cutting the budget deficit in half by the end of his first term (Republicans were demanding attempts to get the budget under control, something they never did during the Bush administration). The level of economic obliviousness this indicates is simple off the charts. It's sort of like announcing your new snow removal policy while people are dropping dead in the streets from 135 degree heat... and it has never snowed at any point in history in your country. Some immediate action on the banking crisis should be agenda item number one, not that I am confident that this will be handled intelligently by the government. We are almost guaranteed that it won't be.

Wall Street is understandably upset about the confidence gap with the new administration. While many financials took a big hit as usual, Citigroup and Bank of America were actually up and are still holding above the penny stock level (a deal was being discussed to convert the preferred stock the government owns in Citi to its worthless common stock). Resource stocks were crushed. U.S. Steel feel 13% on Monday alone. It is almost 90% off of its yearly high and it has a P/E of 1. Aluminum producer Alcoa isn't doing much better, falling 8% on the day and is down around 85% on the year. Coal company ANR fell 8% and is also about 85% off of its high. If these stocks seem absurdly undervalued it is because they are, but that doesn't mean they will be going up tomorrow. In a major bear market, there is almost no limit to how cheap stocks with real value can get. It is of course important to differentiate them from stocks that become equally cheap and will remain so because they don't have any value (currently the financials).

The biggest drops frequently happen at the bottom of a move. The monthly charts indicate that the market is likely to bottom sometime during March at the latest. Short covering will propel the rally that follows. A sustainable long term rally is still somewhere in the distant future and is receding further because of the current drop. In the longer term, zero interest rates and the unending bailouts and spending plans will provide the market with the liquidity which is the fuel it uses for its rallies. They will also mean that you will be paying $50 for a cup of coffee at Starbucks.

NEXT: State of the Nation - Denial

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.

1 comment:

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