Dow zero? At this rate, we'll almost be there by Halloween

Just 19 more days like this one and the Dow Jones industrial average will be at zero. And we can all start over from scratch.

Stocks were hammered today by what many traders described as another round of desperation selling.

The Dow lost 508.39 points, or 5.1%, to 9,447.11, its lowest since September 2003.

We said goodbye to Dow 10,000 on Monday. Today, the Standard & Poor’s 500 index closed below the 1,000 mark for the first time in five years, tumbling 60.66 points, or 5.7%, to 996.23.

The severity of Wall Street’s decline over just the last 2 1/2 weeks has been breathtaking. By the classic bear-market yardstick -- a minimum 20% drop in a major stock index -- the S&P 500 now has experienced a bear market in just 12 trading sessions: The index has fallen 20.6% since Sept. 19.

That would be a bear-within-a-bear. Measured from its record high a year ago, the S&P now is down 36.3%.

Yes, investors are fearful of what will happen to the economy because of the credit crunch. But when selling reaches this magnitude, some portion of it surely has to be disconnected from economic fundamentals.

Art Hogan, veteran analyst at Jefferies & Co. in Boston, noted the relatively uniform percentage declines in broad market indexes today: 5.4% in the New York Stock Exchange composite, 5.6% in the S&P small-stock index, 5.8% in the Nasdaq composite.

"That tells you it’s just waves of people selling everything that’s traded," Hogan said.

Who is so desperate to get out? Many analysts point to hedge fund managers, who are believed to be facing another round of massive redemption notices from clients who want their cash back.

"You’re seeing selling by people whose hands are forced now," said Christopher Johnson, head of Johnson Research Group in Cincinnati.

Ditto for stock mutual fund managers, as retail investors join the exodus.

Then throw in gun-to-the-head selling by investors who bought stock on margin and now are facing margin calls by their lenders -- demands to put up more cash to offset the tumbling value of their portfolios.

As I noted in this post on Monday, everyone’s looking for signs of capitulation -- a final deluge of selling by investors too disgusted and demoralized to hold on any longer.

"Bottoms don’t happen until everyone walks away," said Johnson.

The last two days certainly have had the feel of capitulation. But is it enough, already?

Some analysts say there still are too many market pros reluctant to exit stocks because they’re sure a bottom is near.

Mark Hulbert, who tracks investment newsletters, wrote today on MarketWatch.com that Monday’s market dive -- which saw the Dow off 800 points before recovering about half that loss -- probably was another capitulation false alarm.

"An eagerness to declare that capitulation has occurred probably means that it hasn't," Hulbert wrote. Read his piece here. And be prepared to weep, if he’s right.

Photo: On the NYSE floor today. RIchard Drew / Associated Press

Comments

[Pissed_at_rich_bankers_and_wall_street]

My 401k is down over 30% - and I dont care. I am so angry at the "financial risk assessment professionals" that got us here. I am not spending a single penny outside bare essentials in this country until I see some of these people stripped of their wealth and go to jail.
(I was previously looking for a new king bed, some furnishings, replacing 8 year old tv with a flat screen, etc). I have plenty of cash (almost 300K) and I refuse to buy one thing that is non-essential until I see these criminals go to jail.

[Gary Noel]

Only to zero?? In Railroad Tycoon, when you "get a call from your broker" you often end up owing money. Depends on how leveraged you are. I must admit I have never been as leveraged in the game as a lot of the big Wall Street firms and hedge funds have been in reality. Do you think the investors will actually make good the less than zero amounts, or is that only for taxpayers???

[Bill]

I agree with PaRBaWS, the creeps who invented those complex derivatives and traded them off-market must go to jail. Lets start with BS and AIG, rescind their bailouts and put them in the slammer. GWB, Cheney, Greenspan and Paulson are next.

[JusDaFax]

Capitulation to 8000 before election day. Market nears total collapse as hedge fund and even retail margin calls rule the day...but...pulls back as long-term investors begin to skim off the creme de la creme and McCain fades away in the polls..

2000 point Obama Bounce by the time he takes oath of office as cash pours back into the market as Obama gives brief lip service to free market capitalism.

Months after election day, when foreign investors realize we've elected the most radical candidate in the history of the United States, T-bill auctions start to dry up and $hit really starts to hit the fan. Everything so far will look like a walk in the park compared to what is coming.

[Alicia]

VOTE INDEPENDENT!!! MAKE A CHANGE FOR REAL!!!!!

opensecrets.org

Check out who is paying the bill!!!!

[Phil]

I have one question to ask, nobody saw this coming? I saw this coming a year ago and told all my friends we are in trouble. They all thought I was pessimistic, I tell them I am just a realist. My grandfather always said "if it's to good to be true, its to good to be true". Americans are clueless, it is sad day when people say "I didn't see this coming". Just wait housing prices are going to fall through the floor. The FED is out of bullets now there's nothing to do. That interest rate cut shows desperation, and the fact were in trouble. Thank god I have canned food and ton's of bullets.

[Ronald Trump]

Invest in Canada...not one bank collapsed. Put your money in gold stocks in Canada.

[Dan]

I read The Economist and saw this coming after my stock funds went down 2%, eight months ago. I moved it all to money market funds and government bonds. On $96K I made $16 last quarter. How did your 401k do?

And when I heard the first commercial for a no documentation, option pay mortgage a few years ago, I immediately stopped looking at real estate as I knew that no good could come from it.

Glad to have stayed a renter.

[will]

Dear P_a_r_b_a_w_s and others who agree,

I agree with your anger and I understand your decision to stop spending money, but please just stop buying cheap corporate made-in-elsewhere crap. There is a whole segment of us (furniture makers, in our case) who cannot and will not survive if you truly refuse to purchase anything but essentials.
Talk to craftsmen who have similar values as you, who may be able to create that king sized bed out of locally produced materials, who's income never went to Wall Street in the first place and always was spent in our communities.
Thank you.

[Tim in LV]

Lots of people like myself in the blogging community saw this coming long ago and have been in cash, shorting the financials and REIC stocks, gold, etc. and have not suffered portfolio losses at all. The prospect of job losses though, it's hard to defend against even if you were wearing the tinfoil hat from the very beginning. Ditto for equity loss on primary residence. I have been renting, so no trouble there, other than I'd much rather own. Looks like lots of opportunities coming up for those with cash.

[Tom]

I also am flabbergasted at the large number of Americans, including ordinary citizens, politicians, and members of the financial industry and media, saying they never saw the current debacle coming. This is absolutely astounding and tantamount to an embarrassing self-admission of stupidity. To persons living outside the United States, this conveys the unmistakable impression that Americans are totally clueless and divorced from reality.
As a U.S. citizen residing in Tokyo and involved in the financial communications business, I have helped produce numerous analysts’ and other reports dating back to 2003 warning that the skyrocketing of U.S. housing prices to lethal and unsustainable levels, coupled with the concomitant spending frenzy, would unavoidably bring devastating consequences.
Similarly, in its 2008 New Year editorial on January 1, 2008, the Yomiuri Shimbun, Japan’s largest daily, warned that the United States was destroying itself with “pathological consumption.” It added that the country, on an individual level and collectively, was spending money like a drunken sailor, which the paper surmised as underscoring a breakdown of fundamental discipline needed for building a national base of savings essential for investments in education and crucial infrastructure.
Truly, the current economic meltdown, which comes on the heels of a long succession of self-caused dismal failures by the United States during the first decade of the 21st century, is truly a sad day for America and merely strengthens the view that the United States is rapidly headed toward becoming a poster child for dysfunction.

[wiliam kuehn]

Everyone is angry about the risk managers who took chances beyond reason. Well how about the managers who let them take the risk. Yes the regulators the people like Greenspan, Bush and alike. They were the leaders
who led us down this path. Bush as president, and someone this country must pay for why should we complain about CEO's who manipulate stock for personal gain. LETS PAY FOR REAL PERFORMANCE !!!!!!
William Kuehn
LI, N.Y.