The S&P 500 fell about 19 per cent from its March 29 peak to its October 3 lows, as investors fretted over the toxic debt-ceiling debate in the U.S. and the gathering storm over Greece's debt in Europe.
When the S&P briefly closed just below 1,100 on Oct. 3, the U.S. was this close to one common definition of a bear market—a 20 per cent fall in stock prices from the peak. Other markets around the world, especially in Europe, suffered much worse declines, and were deep in bearish territory.
But that key 1,100 area held. Markets started an enormous rally that continued until last Thursday, when the S&P closed above 1,284 and the Dow Jones Industrial Average topped 12,231.11. It marked a 16.8 per cent gain from the October lows, and came in the face of some slightly better economic data in the U.S. and yet another promising deal to solve the crisis in the Eurozone.
But that deal appears to have unraveled quickly amid plans for a Greek referendum that's likely to reject the European Union's draconian "rescue" package, and stocks plummeted again before rallying Wednesday.
So, what does it all mean? I contacted a couple of technical analysts who pretty much called the drop in the markets this summer, and who flagged S&P 1,100 as a key support level.
They're pretty bullish for the next few weeks and months. But I've become increasingly worried that right now, traditional technical and fundamental indicators may not be as reliable as they used to be, because of structural changes in the markets and the world.
I'll discuss that later, but first, let's hear from the technicians.
Mark Arbeter, chief technical strategist of Standard & Poor's Capital IQ, was one of the first prominent technical analysts to warn of a major correction: Back in May and June, he said the bull market was probably over.
At that time, he said "the S&P could ultimately fall to 1,130…or even down to 1,000 or 1,020 in the worst case."
Now, he told me in an e-mail, "the October 3 closing low for the S&P 500 at 1,099.23 appears to be the end of the major correction that started off the late-April closing high of 1,363.61." The S&P's "narrow escape" from a 20 per cent decline "suggest[s]the bull market is still alive," he wrote.
He said the profit-taking we saw early this week is normal, but he "would not want to see the index retrace more than 50 per cent of its recent rally"—or go lower than 1,184.
That area also is viewed as major support by options expert Lawrence McMillan. Last week in his newsletter, The Option Strategist, he said there was good support at S&P 1,230 and then 1,190 (it closed at 1,237.90 on Wednesday). A sustained close below 1,190 would signal a "major bearish reversal," he wrote.
But McMillan is quite bullish, declaring that October 3 could mark "a major market bottom." He said this October is strikingly similar to the fall of 1998, during the Russian and Long-Term Capital Management crises, when the S&P slid 21 per cent before rallying 19.5 per cent—a bounce very similar to the one we've seen this time.
The market went on to gain another 16 per cent by January 1999, as the Internet IPO boom took off in earnest that fall. A similar move this year would take the S&P "to 1,450 or higher," although McMillan conceded that was "conjecture."
Of course, the currency and LTCM crises ended just about when the rally started in 1998; this time, we're still in the middle of our debt crisis, and it's much bigger. But more on that later.Finally, Sandy Jadeja, the London-based chief technical analyst at City Index, who tracks the Dow, said the large-cap index met his downside target when it fell to around 10,400. He's now looking for the Dow to move higher, with targets of "12,350 followed by 12,580 if the rally manages to sustain itself." (It closed at 11,836.04 on Wednesday.)
But Jadeja thinks this could be a bear-market rally, and he hasn't seen confirmation of the market's recent rally through "higher highs and higher lows," and he believes "the Dow could re-visit the 2011 lows" in 2012.
All other things being equal, stocks should be rallying: We're 2½ years out of recession, corporations are still reporting strong earnings, and interest rates are effectively zero. Don't fight the Fed, as they say. If you're feeling more bullish these days, you might add a little—and I mean a little— to your equity holdings when the S&P drops into the 1,190 or low 1,200s area.
But all things are not equal. Gross domestic product growth is weak in the U.S. and even weaker in Europe, and growth is slowing in the emerging markets that have been driving the train. Unemployment is extremely high throughout the developed world, crimping consumer demand.
Most of all, both Europe and the US are buried in debt, which seriously limits the ability of governments to do the kind of pump-priming that give economies a lift in "normal" times.
Europe's debt problems are so severe, and so intertwined with their banks, that a default even by a small economy like that of Greece could trigger a global financial panic of Lehman Brothers proportions. And let's not even talk about Italy, the third-largest economy in the Eurozone.
In the unlikely event we see a quick resolution to the debt crisis, of course, stocks could soar.
But here's the point—what's driving the market today are decisions made not by entrepreneurs and managers who know their businesses best, but by government officials and appointed central bankers. Politicians are primarily interested in getting re-elected, while central bankers are focusing on the preservation of their own bureaucratic power.
And in Europe, the US, and Japan, we have a dearth of political leaders bold and skillful enough to navigate this crisis in a way that inspires the confidence of citizens and investors.
Finally, the markets themselves appear to be structurally broken. As Leon Cooperman, former Goldman Sachs partner and chairman of Omega Advisors said on CNBC on Tuesday, "The public is out of the market. You really have a bunch of high-frequency traders and hedge funds banging each other." I don't think he meant that literally.
No wonder we see such huge moves in either direction on such light volume. And no wonder traditional value investors are struggling, while investors-turned-traders speculate in ridiculously risky vehicles like leveraged exchange traded funds.
That's why I'm hesitant to look at charts and make comparisons to times past, and that's why I'm staying diversified and keeping my stock exposure modest. The old rules are gone, and we haven't yet learned the new ones.
This time is different. Really.
Howard R. Gold is editor at large for MoneyShow.com and a columnist for MarketWatch. Follow him on Twitter @howardrgold, read more commentary at www.howardrgold.com, and check out his political blog, www.independentagenda.com.