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No Reason to be Bullish
11/19/2008 12:30 pm EST
Jon Markman, editor of Trader’s Advantage, weighs in with a bearish look at the markets.
In the past month, buying power has emerged at the 850 level on the S&P 500, as if guided by a magical hand. It's truly as if buyers emerged from nowhere at that area. With regrets for sounding bearish here at the bottom of a range, I just have to wonder whether these buyers will appear again. Consider that if you were so smart as to buy in the accumulation zone of October 2002 to March 2003, you were probably smart enough to sell near the top last year.
Other than similar lines on a chart, there's very little that's the same now as in 2002, and in fact there's quite a bit worse. In 2002, most large tech and Internet stocks were being ruined, for sure, but many smart and nimble investors were making a lot of money in small-cap stocks, mid-cap stocks, value stocks, banks, and real estate investment trusts. Also in 2002 and 2003, the economy was recovering from the 2001 recession.
At present, it's quite the opposite. We are in the middle of a recession that shows no signs of ebbing and every sign of widening, as job losses are accelerating and credit is impossible to get even for the likes of General Electric (NYSE: GE) and American Express (NYSE: AXP), which is just shocking. Moreover, the distinguishing feature has been the virtually unprecedented way that all asset classes, economic classes, industries, and regions are now correlated with each other. It's about 90%, the highest since at least 1974, according to one study.
You've heard the bromide that says you can survive anything with a diversified portfolio? It's perilously untrue now, as financial, utility, technology, energy, drugs, steel, and real estate stocks are down 52%, 32%, 42%, 38%, 62%, and 45% this year. Just ask the president of Harvard University, who announced that her school's well-diversified, $37 billion endowment was preparing for "unprecedented" losses that would lead to school-wide spending cutbacks.
Normally, the desire to take smart risks is exactly what characterizes the smart money. Yet I am hearing from my sources at the largest banks and funds on Wall Street that executives have been specifically telling stock and bond trading desks not to take any big risks at least through the end of the year.
My conclusion from all of this is that buyers, if they emerge, will mostly be traders seeking to take advantage of the range trade and the government. It's possible that we could also see value managers stepping in, but they have been blasted so many times already in this market that I am beginning to think that even they will shy away from the risk involved.
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