Tuesday, February 24, 2009

Financial Crisis, 24 Feb 2009: Dow 7,350.94, +236 (+3.32%)

Today Wall Street breathed a sigh of relief and bounced back up nearly all losses it suffered the day before. The Dow Jones Industrial Average (DJI) index ended the day at 7,350.94, up 236.16, or +3.32%.

Market bottoms will be tested in the next weeks. If the Dow can hold at this level, then it may avoid settling down below 7,000. But if the gains of this day are eroded by futher bad news, then additional erosion or a precipitous drop can follow.

Today the question was raised whether the Dow Jones Industrial Average index should be overhauled. Periodically the Dow’s select list of stocks are modified. Old titans of industry are replaced by tested up-and-comers to the blue chip category. Certainly General Motors (GM) and Citigroup (C) are highly challenged stocks.

This sort of reshuffling at the top indicates major market changes in basic valuation. Analysts looking for more cross-market performance levels prefer to look at the broader Standard & Poor’s (S&P) 500 or the Dow Jones Wilshire 5000. The former gives more of a “market leadership” view, while the latter is the near equivalent of the entire valuation of the entire U.S. stock market, comprising all the valuations of the companies within the New York Stock Exchange, NASDAQ and the American Stock Exchange.

A Somewhat Poorer Standard & Poor’s 500

The S&P 500 (SNP: ^GSPC) closed at 743.33 on 23 Febuary, and bounced back up 29.81 (+4.01%) to 773.14 on 24 Febuary. It is down 48.39% from its 52-week high of 1,440.24.

On 9 October 2007, the S&P 500 closed at an all-time high of 1,565.15. Since then, the value of the index has slid 52.51%.

Wilting Wilshire

The Wilshire 5000 (^DWC) currently stands at 7,833.85. It had a one day bump up +308.23 (+4.1%) from its near-yearly low yesterday.

The Wilshire 5000 index is down 45.69% from the 52-week high of 14,423.75, which it hit on 16 May 2008. It is down 50.44% from the index’s all-time high of 15,806.69 which it hit on 9 Oct 2007 (the same day the S&P500 had its all-time peak).

50% in 500 Days

In the past 504 days, since 9 October 2007, the U.S. stock market has lost more than 50% of its value. It was the historical capital market equivalent of “gone in 60 seconds.” Or, at least, half-gone.

At first, the trend was not greatly noticeable. After hitting its all-time high on 9 October 2007, the value of the market eroded slightly over most of the subsequent year. Over 11 subsequent months, specifically the following 329 calendar days, the market flitted downward slowly.

By 2 September 2008, the S&P 500 was holding up at 1,277.58. While that was already down 18.37%, this was not specifically alarming. The Wilshire 5000 likewise had drifted down to 13,064.50, off 17.35% from its high. These losses were gradual over the year. The oncoming crisis was already being predicted, and increasingly made a focus of speculation and analysis.

It was only after this point that the market begin its precipitous slide. The steepest drop came in the first weeks of October. The worst was 20 November 2008, when the S&P 500 hit 752.44, and the Wilshire 5000 bottomed out at 7,471.44.

Precarious Point

The present lows this week are a second testing of the lows hit on 20 November 2008. If the market continues to settle out here, any “third test” of the low may break through a technical resistance point, and the entire market can plummet to another lower basis. How far would it plunge? 500? 1,000? 1,500? This is why it is called speculation. Different models, based on different assumptions, can produce different results.

All the economy needs is another stochastic shock, more disappointing news, or the shift of another international indicator, and it can precariously tumble once more. Yet given the strong positive bounce between the 23rd to the 24th of February, it seems possible that the present resistence level of the market seems strong. We may have reached a bottom for now.

Let’s see what a week’s more data shows.

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