PLUCKY BOUNCE late Friday lifted the Dow Jones Industrial Average back above 11,000 after it had plummeted below that threshold for the first time in two years. But is it a sign the fever gripping the stock market has finally broken?
Investors are praying that the thermometer measuring the market's misery surely must have peaked: The Standard & Poor's 500 fell into bear-market territory last week and had skidded almost 22% from its peak. It has gone 36 days without as much as a reflexive 2% bounce. The discomfort also has spread, with the bear mauling nearly 60% of 84 stock markets around the globe (and sparing only the oil-rich states), according to Bespoke Investment Group. The 6.67 billion shares of New York Stock Exchange stocks that traded Friday was the third highest ever.
If that doesn't say anguish, consider this: Each time the stock market eked out an advance, it tumbled by a bigger margin the next day, and this particularly blood-curdling species of "Bounce Interruptus" was spotted 16 times over the past 50-day period -- the most in 70 years. "If the market were a book, its title would probably be The Little Engine That Couldn't," says Bespoke analyst Justin Walters. He adds that the deepening slide has led him to anticipate a short-term rally of 5% to 10% within the longer-term decline.
The S&P 500 and the Nasdaq Composite Index both fell for the sixth straight week, while the Dow's losing streak stretched to four. The Dow ended the week down 188, or 1.7%, to 11,101, after falling as low as 10,978 Friday. The S&P 500 lost 23, or 1.9%, to 1239, its lowest finish since July 18, 2006. The Nasdaq gave up six, or 0.3%, to 2239. Only the Russell 2000 snapped its five-week losing streak and gained nine, or 1.4%, to 675.
The stock market increasingly is oversold, with traders now flinching even before the connected blow of bad news. Stocks careened up and down with the fluctuating prospects for mortgage giants Fannie Mae (ticker: FNM) and Freddie Mac (FRE) -- see "Fannie and Freddie" -- while muted forecasts from Alcoa (AA) and Marriott (MAR) drove home the grim reality.
By Friday, the casualty list was staggering: More than 85% of S&P 500 stocks have slumped below their 50-day averages -- compared with 96% in the consumer discretionary sector, 97% in financials, 87% in technology and even 79% in the energy group. These take the market closer to at least a temporary rally.
What might provide the cue? "The market wants clarity from financials, and it wants to see first that financials have bottomed," says Peter Green, publisher of GreenScreen, which takes a broad overview of the equity markets. A decisive 8% to 10% rally by the Financial Select SPDR (XLF), especially in the face of bad news, would constitute a clear sign the group has bottomed. In fact, the covering of short bets on Friday -- before bellwethers like JPMorgan Chase (JPM) and Citigroup (C) report earnings this week -- showed some traders bracing for this possibility.
But why not a more lasting rally? For all the pain, one wonders if the market has seen the kind of unconditional surrender that marks an enduring turn. For instance, anxiety as measured by the VIX volatility index flirted Friday with 29, almost but not quite near peaks above 30 seen in January and in March. Also, VIX futures suggest traders expect this fear gauge to quickly relax to about 25 by August -- and for stocks to stabilize soon. Meanwhile, the fundamental picture remains bleak, with nearly every yardstick of consumer wealth -- jobs, real estate, stock portfolio, access to credit -- heading in the wrong direction, with no turn in sight.
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