Sam Collins

Surviving the Sell-Off

by Sam Collins   10/03/08

Gloom settled over the markets Thursday, despite the passage of the $700-billion financial relief plan by the U.S. Senate. Some of the pessimism centered on doubts about the revised bill's passing through the House of Representatives but most came from some poor economic numbers.

Weekly jobless claims for the week ending Sept. 27 increased to 497,000 versus an expected 475,000. And August factory orders fell 4.0%, well above an anticipated 3.0% decline. The rise in jobless claims ahead of today's unemployment report caused the biggest stir since it indicates that even if the bailout bill is passed, the economy is faltering and investors will have to come to grips with a recession.

Selling was widespread with Marriott International (MAR) off 5.53% after warning of falling profits. Shares of large global industry leaders fell too. Caterpillar (CAT) was off 8.3%, Alcoa (AA) down 8.9% and General Electric (GE) fell to a new low, off 9.6%.

Crude oil prices headed south and so did shares of many energy stocks. ConocoPhillips (COP) was off 4.2%, and Chevron (CVX) was off 3.21%. Merrill Lynch (MER) cut its 2009 oil-price forecast to $90 a barrel from $107 and warned that a global recession could even take crude to $50 a barrel.

At the close, the Dow Jones Industrial Average (DJI) was off 348 points to 10,483. The S&P 500 (SPX) was down 47 points to 1,114 and the Nasdaq (NASD) fell 93 points to 1,977.

The New York Stock Exchange traded 1.5 billion shares, with decliners ahead of advancers by 5-to-1. On the Nasdaq, decliners were ahead by more than 4-to-1 and 885 million shares were traded.

Crude oil (November contract) fell $4.56 to $93.97 a barrel, and the Amex Energy SPDR (XLE) fell $3.55 to $58.71.

The December gold contract fell to $844.30, down $43 per troy ounce, and the PHLX Gold/Silver Index (XAU) closed at $111.04, down $20.33.

What the Markets Are Saying

After moving to a less bearish stance, the Association of American Individual Investors survey this week saw the bears pick up 10%. And the Advisors Sentiment numbers recorded by Investors Intelligence also showed an increase in bears to 47.2% from 40.2% the week before and a decline in bullish sentiment to 33.7% from 37.5% last week. This was the lowest bullish reading since mid-August.

So are we establishing a bottom?

Curiously, at the break of bear markets, which signals the final slide to new lows, both sentiment sources score very high bearish numbers. In other words, the public and writers are usually bullish on balance through two major declines but capitulate just before and during the final break.

For example, in September 2001 and then from May to June 2002, some the highest bearish readings of that period occurred as the market broke to its final lows which were made first in July and then in October.

Last month, the market broke through support just above S&P (SPX) 1,200 and began a final crushing of the bulls -- the third phase sell-off. But there will no doubt be rallies and some of them will be very sharp and some could rise as much as 5% to 10%.

Perhaps we will see a rally from the passage by the House of the financial relief bill. But the message is clear that a sell-off is in progress and it is better to take final measures to protect cash and/or engage in insuring portfolios through the use of various contra-Exchange Traded Funds (ETF).

Today's Trading Landscape

Family Dollar (FDO) will be reporting earnings today.

The following economic reports due: September nonfarm payrolls (the consensus expects a 105,000 loss), September unemployment rate (the consensus expects 6.1%), and September Institute for Supply Management (ISM) Non-Manufacturing Composite Index.

Wells Fargo (WFC) has agreed to buy Wachovia Corp. (WB) for a $15.4-billion deal that will require no government help.

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