Courtesy of John Nyaradi.
As global stock markets sell off in response to growing concerns over Europe, observers and participants must now ask the question, “How low can this market go?”
And the answer is, “a lot lower than they are today.”
In today’s action, major losses were wracked up around the world:
Nikkei Index: -0.72%
Topix: -0.76%
Hang Seng: -0.51%
Stoxx 50: -2.6%
FTSE 100: -1.1%
DAX: -2.1%
In U.S. trading at the noon hour in New York, major U.S. indexes were off substantially with the Dow Jones Industrial Average (NYSEARCA:DIA) down 1.3%, the S&P 500 (NYSEARCA:SPY) off 1.9% and the Nasdaq Composite (NYSEARCA:QQQ) sliding 2.0%.
Oil (NYSEARCA:USO) took a steep tumble to $78.31, down 1.8% in mid-day trading, as investors fretted over a slowdown in global economic activity.
Gold (NYSEARCA:GLD) advanced to $1585.70, up 1.2% on safe haven flight, along with U.S. Treasuries (NYSEARCA:TLT) up 1.5% as investors sought the safety of U.S. Treasuries.
All of this depends, of course, on the future of Europe. A disorderly breakup of Europe would be the equivalent of an international “Lehman Event,” and we all remember how low markets went during the last financial crisis with the Dow Jones Industrial Average (NYSEARCA:DIA) dropping to 6,547.05 on March 9, 2009, and the S&P 500 (NYSEARCA:SPY) with a closing low of 676.53 on March 9, 2009.
We could certainly see these kinds of levels again as the last three years’ rally has been mostly fueled by easy monetary policy and Federal Reserve intervention in the form of quantitative easing. Now with the Fed running out of bullets (just today Jeffrey Lacker, President of the Richmond Federal Reserve, said that he doubted more bond buying would boost economic growth) we enter a new and more dangerous phase as markets begin to realize that each round of Fed action has less impact and shorter term results.
Even without a catastrophic end to the European Union, we seem to be in for a long, hard slog as Europe enters recession, China slows down and the U.S. economy barely stays above flat line. It seems quite obvious that U.S. earnings are going to be impacted and that tough economic times lie ahead.
How Low Can We Go?
Looking back in history, we see some notable declines in the Dow Jones Industrial Average (NYSEARCA:DIA)
Great Depression: -90%
1973-1975: -45%
1987: (Black Monday) -22.6%
2001 Recession: -38%
2008 Recession: -50%
In more recent history, the Dow Jones Industrial Average (NYSEARCA:DIA) reached its peak on October 9, 2007 at 14, 164. Today the Dow Jones Industrial Average (NYSEARCA:DIA) is approximately 12, 484, off 11.8% from its most recent high.
So it’s easy to see that this recent 11.8% decline is very mild in relation to historical standards and so further declines would not be the least bit unusual.
chart courtesy of StockCharts.com
In the chart of the S&P 500 (NYSEARCA:SPY) going back to 2008, we see several significant support levels as indicated by the red horizontal lines. These are key lines and levels to watch as sustained breaks below one sets up the probability of a fall to the next lower level.
In round numbers, these levels are 1250, 1100, 1000, 850 and then to the 666 recent low.
Estimates of “how low can this market go” vary from 90% losses to more garden variety 10-20% losses as a “bottom” is being formed.
No one has a crystal ball and so an exact number cannot be forecast, however, for the short term, a break below the 200 day moving average at 1295, followed by a break at 1250 would set the stage for much lower prices ahead. Declines of 50-60% would be quite feasible and technical patterns point to the S&P 500 (NYSEARCA:SPY) reaching 800 as a final target could turn out to be reasonable.
Bottom line: S&P 500 (NYSEARCA:SPY) of 800 is 38% below current levels, 43% below recent highs set in May, 2012, and 49% below the all time high set on October 9, 2007, which seems like a long, long time ago in a land far, far away.
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