Stocks have suffered through an epic November even after the recent surge, and the index roll call this year still has the capacity to shock: The Dow is down 39%, the S&P 500 is down 45%, the Nasdaq is down 48% and the Russell 2000 is down 47%.
Among major mutual funds, the totals are worse because many opted to buy financial stocks too early. Fidelity Magellan (FMAGX) is down 59%; Dodge & Cox Stock (DODGX) is down 52%; Growth Fund of America (AGTHX) is down 46%; and Harbor International (HAINX) is down 52%.
This continues to be a slow-motion train wreck, with most cars of the global supply chain derailed: Energy, health care, staples, technology, retail, international ETFs, commodities and corporate bonds are equally savaged. Only a couple of survivors remain on the tracks: The U.S. dollar and Japanese yen are both up around 15%; the 20-year Treasury bond ETF is up 12%.
After such an incredible rout, it’s tempting to want to turn bullish. Financial assets have taken such a beating that the screams of pain from participants have spurred governments worldwide to jump from their natural state of entropy into action. U.S. fiscal and monetary authorities alone are on schedule to pump $7 trillion into the financial system, and more is on the way.
Bulls say that all this government money just has to find its way into stocks, and that eventually we will see an explosion of asset values higher. I am sympathetic to this view. It ought to be happening. Yet we need to be pragmatic.
Bulls made this same argument in January, in March and in July. And they have been wrong every time, for reasons I have detailed for months: The money is going into banks and they are using it to absorb past losses, then hoarding the rest to plan for future losses. They are not lending the money out, which is the only way it can actually get into circulation.
If money were flooding into markets, we would start to see it in the accumulation of shares at recent lows. Markets don’t just start moving higher one day after a long decline. First they stop going down, then they consolidate within a range as frustrated longtime shareholders finally give up and sell their stakes to value investors, and then they start moving higher, usually after a period of at least six to ten months. (See also: "Is This the End of Money?")
Every major bottom — 1932, 1974, 1982, 2002 — shows this extended period of accumulation in which there are overlapping one-month bars clearly visible on multiyear charts. And then after the long consolidation, the market finally crosses up over its 12-month average once, which is a yellow light, and then twice, which is a green light, and then you’re good to go for a rootin’ tootin’ bull market. Stay tuned.
What’s critical to realize now is that the past week’s collapse below the prior six-week range created a shelf of what the technicians call "overhead supply," as you can see in the Google (GOOG). This is stock that will likely be dumped on the market every time it tries to rise up to the 850 to 950 level of the S&P 500.
The best we can hope for at this point is a long period of listless consolidation in which both bears and bulls grow apathetic. After around 10 months in this dead zone, if that’s what happens, we could finally start making real progress.
Chain Reaction
Every time that I want to throw caution to the wind myself and get on the bull train, I look at the prospect for retail sales this season and shiver.
It’s easy to imagine that terrible retail sales are already discounted by the market, with Nordstrom (JWN) trading as low as $6.60 last week, Saks (SKS) at $3.75 and Starbucks (SBUX) at $7.25. Those are price tags I thought I would never see. Yet I still wonder if the shock of a lousy season of epic proportions is truly in the stocks.
Starbucks announced after the bell on Monday that it will report negative same-store sales through all of 2009, and its earnings will be smacked by least termination and severance costs through the year as well. Shares were down another 5% in late session trading.
Earlier in the day, MasterCard (MA) reported that U.S. apparel sales were down 19% from a year ago. Women’s apparel were down almost 20% in the first half of November; men’s were down 20.5%; footwear was down 11%; total luxury sales were down 21%. An analyst said, "We’ve been seeing a deteriorating retail environment for some time, but in the last 10 days of October things started to deteriorate rapidly. That’s continuing in November."
Here’s the unfortunate situation: Stores ordered a lot of goods last January when times were much better. They then had to pay for a lot of them in the summer, and were not able to get credit — so inventories are now lean. Customers are finding less on the shelves than usual, and so they are less likely to find what they want.
Fast-forward now to January, once the stores have slashed prices to the wall to get remaining merchandise out the door in the holiday season. Many will find it still impossible to get credit and will be unable to restock for spring. Thus, you can expect a slew of January bankruptcies in retail. This might in the stocks already, but I’m skeptical. If you own retailers, be wary.
To learn more about trading the new range and retailers, check out Trader’s Advantage.
This article was written by Jon Markman, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.
