Michael Santoli at Barron’s discusses falling stock prices and buyers’ paralysis, noting that this year, had it ended Thursday, would be "the worst since 1872." 
Major Damage
By MICHAEL SANTOLI, writing in Barrons.com.
This negative-feedback loop will be broken — but when?
Excerpt:
A FUNDAMENTAL STOCK PICKER IN TODAY’S MARKET must feel like the hotshot college quarterback taking his first snap opposite an NFL defense: The schemes are inscrutably complex, the margin for error slim, punishment for error large, the opponents are far faster and stronger than he’s accustomed to facing, and each has a powerful financial incentive to plant him a foot deep in the turf.
Oh, and the final drive almost always determines the outcome of the game — in stocks’ case with the final hour of trading painting the entire day’s tape. (Would the presidential-transition authorities have had this in mind Friday, when they leaked the likely nomination of New York Fed President Timothy Geithner as the next Treasury chief at precisely 3 p.m., on an options-expiration day, in time to invite a ringing rally? I’m not accusing, just asking.)
The velocity and ferocity of the market movement — mostly downward — on a tick-by-tick basis has induced a buyers’ paralysis disguised as patience…
Keith Lerner, a quantitative strategist at SunTrust Robinson Humphrey, refers to this dynamic as "stock deflation," an ingrained expectation that prices will keep falling.
While this feedback loop is always eventually broken by an abundance of cheap stocks piling up knee-high as investors stand still, when this happens is unknown. But the longer this assault lasts, the less important it will be for a buyer to pluck the exact low or select the precisely right stocks, so nipped are prices and, in many cases, values.
The virtually unwitnessed level of damage in a short period almost defies hyperbole. After Thursday’s drop to an 11-year low on the S&P 500, the index was farther below its all-time high than at any time since 1949. The year 2008, had it ended then, would rank as the worst since 1872 at least. The S&P hadn’t been as far below its 200-day average since 1932. Nearly 40% of S&P 500 stocks were below $4 billion in market capitalization, the minimum new stocks must meet to be added to the index. More than 40% of the stocks in the Russell 3000 were trading below $10…
All this helps explain the wild 6.5% snapback to the upside in Friday’s final hour. At some point, the market requires fresh, and ever more dire, excuses to keep falling, and such excuses temporarily ran out.
Yet that sad litany of woe also suggests that equities, as an asset class, are in the process of being discredited in the public mind. We’re not quite there, lacking as we do the perfectly culminant magazine covers declaring equities dead, among other things. But, ultimately, it strongly suggests that the direction of long-term mean-reversion is becoming more favorable for stocks.
At the moment, the only close precedents for the past year are a pair of Great Depression-era bear phases…
Full article here.
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