“Shouldn’t the market bounce here?”
“How oversold can we get?”
“Are stocks going to zero?”
These are the kinds of questions I fielded this week from clients. My answers:
“Yes, a market bounce is long overdue.”
“But we can go down another 10% in the blink of an eye regardless of oversold conditions.”
“No, not all stocks are going to zero but some are and a lot more are going to trade for cents on the dollar.”
For example, AIG, the largest insurance company in the world and Fannie Mae and Freddie Mac, the largest mortgage companies in the country, are officially penny stocks. I expect Citibank will joint their ranks soon. It is now just a tad above $1.00 a share while Ford and GM are not far behind.
This week was brutal. The markets suffered almost a 10% decline. Over the last 20 days the Dow has lost 20% and 26% so far this year. The others averages have faired no better. From its October 2007 peak, the Dow is down 53.4%, the second largest decline (after the 1929 Crash) since 1896. We also hit my 680 target on the S&P 500 by the way, but I take no joy in being bearish for the last 14 months.
Since people in the forecasting business get no credit for past performance however, no sooner did we hit my level then clients and readers began to call or e-mail with the obvious question.
“So, Bill what happens now?”
There is no easy answer. One should expect at least a healthy bounce from these levels. Something along the order of 10-20% or more which is what we experienced after the October and November lows of last year. But so far every rally attempt has been nipped in the bud by sellers.
As I wrote two weeks ago in “The Worst Kind of Decline” none of the capitulation that identifies a bottom has occurred yet. There is no panic, no mad rush for the exits only a constant, orderly selling pressure. Since just about every trader on Wall Street is expecting a “bounce”, the most inconvenient thing that could happen to the most number of people is for the markets to just continue to go lower.
If I just do a simple, off -the -cuff calculation of where the S&P 500 could go next, 538 would be a guess from a technical standpoint. From a fundamental point of view, I could argue that the markets won’t bottom until the S&P 500 index is selling at a single digit price/earnings ratio (P/E). That level might finally attract value investors. From that perspective, the market would need to fall to 459.
So let’s take the average and round it to 500. As I’ve said before, no one can call a bottom so we will call 500 our worse case scenario. That would take us back to 1995, the lowest level in 14 years.
However, not all investments are declining. As I mentioned last week, gold and silver have experienced a healthy correction. Both precious metals traded down to the bottom of my target range (gold at $904/OZ., silver at 12.26/OZ.) Since Thursday both have begun trading upwards again. I believe that will continue. At the same time, my other recommendations, the U.S. dollar and U.S. Treasuries have also had a winning week with the dollar now at a six year high versus the Euro. These are flight to safety investments which should continue to work well in my opinion until the downside in the stock markets subsides.