Ready for Another Leg Down

by: Bob Lang posted on: July 11, 2008 | about stocks: DIA / IVV / QQQQ / SPY    
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Ready For Another Leg Down
 
As we've seen the markets reach the lower depths of the abyss, it's time to assess and figure out what's coming in the next timeframe.  The March/Jan lows are history, as this bear market continues to test multi-year levels.  With so much negativity, yet so much 'hope' out there, it seems difficult to believe the markets will pull into bullish mode. At worst, the downtrend continues. At best, the markets are range-bound, before the next leg down.
 
This Time, There Will Be Piling On
 
Bear raids are vicious, and look no further than recent momentum favorites.  The coal group was blasted just last week, ags, metals, nat gas and other key sectors were taken to the woodshed and shot.  When there is no place to hide, you know a bottom is near.  But, is it really?  Bears have been selling stocks indiscriminately and raising cash, not a bad thing of course.  Higher oil, geopolitical concerns, housing, credit...and these are just a few reasons.  Inflation is another one.  But the economy is also slowing, and with that there will be what are known as earnings and price 'resets'.  What are resets?  Basically, analysts redo prices, earnings and targets adjusting to a slowing environment.  Bottom line, the optimistic expectations turn to pessimism... fire in a crowded theatre.
 
When Cisco Says a Recovery is delayed, then...
 
When a big firm shows smoke, it can't be too long before you find the fire.  On Thursday, Cisco (CSCO) mentioned that the recovery may not happen until 2009.  That's their best guess, but probably still too optimistic.  In fact, other companies have started to join the 'delay parade'.  We normally see this in front of a big downturn in the market.  Witness 2001, before the 9/11 tragedy.  We saw big firms come out and say the recovery was delayed, no visibility and customer cancellations.  This prolonged the last bear market, which didn't truly bottom until late 2002.  This time should be no different. 
 
Buyers are Nascent
 
Finally, let's talk about market structure.  Buyers have been absent.  Yes, we've seen a few rally attempts fueled mostly by short covering.  But for the most part, the big players are staying out of the game.  For good reason, of course...this market is difficult to navigate for a trader, no less an investor.  Where is the bottom, and more importantly... when is the bottom.  The answers won't be known of course until after we've been there.  Actions speak loud however, and for the now the sellers rule the roost.  Buy the dips and sell the rips is still the market mantra.
 
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This article has 5 comments! Add yours below...

Bob Lang

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This article has 5 comments:

  •  
    LarryH
    Jul 11 10:11 AM
    Good piece, Bob. We really have to roll with the punches of this market. Anyone who is inflexible will be crushed. Hope for the best but prepare for the worst.
  •  
    User 164588
    Jul 12 08:51 AM
    1929 all over again
  •  
    sorgmot
    Jul 12 05:07 PM
    My Website
    We are looking for a DJIA low in October 2008, then a modest rally to March 2009, and then a drop to a lower low in October 2009.

    The 2009 low should be below the 2002 low on the Dow.

    We use Elliott Wave analysis.

    We think it is now 1938 and that the second down wave will be worse than the first one this time as it was not in the 1929 to 1939 case.

    Interest rates are now heading up and will pull down earnings and P/E multiples for some years to come.

  •  
    kotika98
    Jul 13 12:01 AM
    are you guys saying the money wasted on subprime loans is greater than the money wasted in the dotcom bubble?
  •  
    jlounsbury59
    Jul 13 01:15 AM
    My Website
    Kotika98 - - -

    The author and commenters are not talking about simply a subprime loan situation; this is a financial system meltdown problem. We have had other financial system crisis times (1980, 1987, 1998) and managed to pull out of them. This time we are are dealing with highly leveraged debt on depreciating assets which is several times larger than the U.S. national debt. This is a bigger problem and the outcome is in doubt.
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