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Investors know all about the economic and
geopolitical headwinds hurting stocks. Debt problems in Greece spreading
to other European countries. Crude oil gushing into the Gulf of Mexico.
Korean saber-rattling.
The latest blow came Friday: a fragile U.S.
economy unable to create enough private-sector jobs to quell fears of an
economic relapse.
The newest obstacle? The negative price action of
stocks themselves. The Dow Jones industrials fell 115.48 points Monday,
capping a two-session drop of 439 points and closing at 9816.49, a
fresh 2010 low. Analysts who measure the market's health by studying the
price charts of major stock indexes are starting to warn of serious
deterioration. They say if the downdraft is not halted soon, it could
lead to a second leg down and an official bear market, or 20%-plus drop.
The Dow is 12.4% below its late April peak, and
the Standard & Poor's 500 is down 13.7%.
As is often the case when stocks are falling,
Wall Street points to certain price levels that amount to a "last line
of defense" for the stock market, says money manager Gary Kaltbaum. In
general, if buyers appear and stocks can stay above prior lows deemed
important, it's a sign of strength. The flip side: If these levels give
way, it's a sign buyers are not willing to step up, and lower prices are
likely.
Many — but not all — of the market's support
levels have already been violated. Both the Dow and S&P are now
below their 200-day trend lines, which historically has meant the market
is in, or close to, a downtrend. "It's bearish," Kaltbaum says.
Both indexes have also fallen below their
panic-induced intraday lows hit during the May 6 "flash crash," as well
as the closing levels hit in the last nasty correction back in early
February.
The last line in the sand for stocks is the 1045
level on the S&P 500, its intraday low hit on Feb. 5, many analysts
say. "There was a tremendous amount of pessimism back then, stocks were
oversold, and the market turned up," says Bruce Bittles, chief
investment strategist at R.W. Baird. "If we don't hold those levels, we
are looking at a 20% bear market drop." The S&P closed at 1050.47
Monday.
A potential positive: Neither the Dow nor S&P
500 are down more than 15% from their highs. That's good news, as
S&P data show that bear markets have occurred 80% of the time since
1946 when a market correction goes beyond 15%.
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- Netvibes
- myAOL
NEW YORK — One by one, the planks that serve as a floor-like support for stock prices are giving way amid ongoing selling pressure on Wall Street.