Still Stuck in the Bear's Claws

About a month ago, we detailed the stock market's dismal performance during the month of January.

As it turned out, February was even worse.

Using the S&P 500 Index as our measuring stick (consistent with IcebergCarwash policy), the market declined another 11% in February.

With two months in the books, here are some quick facts on where the market stands to this point in 2009:

* The S&P 500 Index is off 18.6% since the start of the year. That represents the worse performance on record for the first two months of the year.

* The Index has declined in five out of the past six months.

* Friday's close marked the lowest level for the S&P 500 since December 1996.

Friday's market action was particularly disturbing, as the S&P 500 closed at a new low, albeit still within range of the lows established in November 2008.

This is important, because from a technical analysis ("chartist") standpoint, when a market establishes a new low, it usually needs to re-test that low once or twice (or more) before a sustained rally can take place. This week's activity appeared to represent a re-test of the November lows. On a few occasions, the market seemed to bounce off those lows, in intraday trading, indicating that perhaps the lows would hold. This would actually have been a decently bullish signal. However, by breaking below the low, it is now possible that a new "floor" needs to be established, and it will be quite a while before the market can move meaningfully higher.

Think of it as a Groundhog Day for the stock market. If the market withstands a test of the bear market lows, it can move higher. If not, we need to go back into our respective holes in the ground, and the long, cold stock market winter will continue.

Given that Friday's closing level on the S&P 500 is still within range of the recent lows, it's too early to tell. However, if the Index falls further, say a close below the 725 level, that will mark a bearish trading signal, as the market continues to make lower lows. Needless to say, we should keep a close eye on Monday's action. A continuation of Friday's decline would be particularly disconcerting.

From a fundamental standpoint, on the other hand, stocks look cheap. Whether you base your valuations on dividend yields compared to Treasury yields (even after discounting for the inevitable dividend reductions, see GE), P/E ratios (adjusting your earnings estimates for a worst-case scenario), price/net book value (the ghost of Benjamin Graham haunts the canyons of lower Manhattan once again!) or some other methodology, the stock market looks oversold right now. However, all that tells you is that at some point in the future, stocks should be higher than they are now. From an amateur chartist's perspective, that could take a few years to materialize.

Unless we get our buy signal.


For now, things look rather bleak.

Then again, look at the bright side.

The market can't possibly perform worse in March than it did in January and February.

Or can it?

Maybe I'll ask Punxsatawney Phil at our lunch meeting this week.

Anyone out there have a recipe for alfalfa pie?