Wednesday, March 4, 2009

Charts Suggest Dow Is Due for a Bounce

Stock investors are overdue for some good news, and they might get some soon -- if only briefly.In the latest leg of the worst bear market since the Great Depression, the Dow Jones Industrial Average has fallen five days in a row and 11 of the past 13. The average's gains since roughly the second inauguration of President Clinton have now been erased.

Technical analysts, who study price movements and other indicators, take one look at this horrendous dive and see a spring coiling to rebound. They may be on to something: Stocks may be destined to plow unthinkable new lows, but they probably won't get there in a straight line. One of the tarot cards in the technician's deck is the 200-day moving average, a measure of the trend of a stock, index or tulip bulb. Being too far above or below that average can be a sign a correction or rebound is due.

Currently the Dow is 32.6% below its moving average, not far from its 34% undershoot on Nov. 20, just before it rebounded. It is rare for the Dow to be more than 30% below the moving average. The only other instances were during the Depression, though there were less-deep troughs in 1974 and on Black Monday in 1987.

Rebounds, however short-lived, typically follow such episodes, notes author and trader Michael Panzner. Together with other technical tea leaves, "the better bet is to the upside" right now, he says -- though he is still a long-term bear.

And with good reason: The economy still has staggering imbalances, which will take time to unwind and may threaten new stock-market lows along the way.

S&P 500 Profit View Skews Wider Than Usual
The worst earnings quarter in recent history is coming to a close. Now the Street is examining what is ahead.

With the vast bulk of the S&P 500 companies having reported their financial results, operating earnings for the fourth quarter of 2008 look to end in negative territory for the first time since Standard & Poor's starting keeping track in 1988. The overall loss of about 56 cents a share was prompted largely by American International Group's fiscal disaster Monday, but even without AIG, the gain of $4.57 would be a record low.
As for this year's initial quarter, while operating earnings are expected to show improvement, "it's still going to be a bad quarter," says Howard Silverblatt, senior index analyst with S&P.

S&P's analysts, the bottom-up team that projects profits at the individual company level, see first-quarter 2009 operating-earnings of $13.45 a share on the S&P 500, down 19% from a year ago. But S&P's strategists, the top-down squad that projects profits at a macroeconomic level, see profits of just $11.66 for the quarter.

That gap, wider than it has been in years, expands greatly over the course of 2009. Analysts expect each quarter will be better than the last, yet strategists expect profits will stay limp.
For what it's worth, Mr. Silverblatt notes, in stressed periods the top-down squad is usually more accurate.
—Jeff D. Opdyke


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