Can stocks rally back from 2008 low?

Can stocks rally back from 2008 low?
(USA Today)11 March 2008

NEW YORK - It’s test time on Wall Street

The question: Can the stock market right itself after falling below its January low — a level analysts say is a key level of support, or floor, that cannot be breached?

The outcome of the pass-or-fail test could provide a road map for where the struggling market is headed, says Richard Suttmeier, chief market strategist at RightSide.com. And that’s key, considering the Dow Jones industrial average, down 16% from its high, is flirting with a bear market, or a loss of 20%.

Last week, stocks continued their downward trajectory as the broad market declined nearly 3%. Another wave of bad economic news drove the selling. Headlines touting the biggest monthly job cuts in five years, more distress in the frozen credit markets and margin calls at a mortgage company and private-equity firm exacerbated fears of recession.

All three major U.S. stock indexes — the Dow, Nasdaq composite and Standard & Poor’s 500 — closed below their Jan. 22 lows, a level that, at the time, bargain-hunters viewed as a good buying point.

But the fact that stocks broke that 2008 low should serve as a “warning flag” to investors, Suttmeier says.

It is not uncommon during market downtrends for stocks to rally back from the dead only to relapse and head back down toward prior lows. This so-called retest of the lows is a way for traders who study stock charts to confirm whether stock prices have bottomed out for good or whether they need to fall more to attract buyers.

Despite the market’s recent descent to fresh lows, however, it is too early to tell whether it will ultimately pass or fail the test.

“We are still awaiting to confirm another leg down,” Suttmeier says.

Mark Arbeter, chief technical strategist at S&P Equity Research, also says it’s premature to say the market is headed decisively lower, even though the market is “sitting right at the edge” of more pain.

If the benchmark S&P 500 index, which closed Friday at 1293, continues to trend lower and dips, say, 1% below 1270, its intraday low hit in late January, and stays down there for two or three days, then the odds that the market is heading even lower would “increase dramatically,” Arbeter says. The S&P would have to decline nearly 2% from current levels to pierce the 1270 level.

The reason stocks tend to nose-dive after a key support level fails to hold is because all the buyers who came in at the prior lows are now “sitting on losses,” Arbeter says, and they sell to cut their losses.

Market bottoms don’t typically occur until panic surges and investors capitulate en masse. Only after everyone who wants to get out does can real buyers step in and push prices back up in a meaningful way.

“Panic? We haven’t seen it yet,” says Suttmeier, who is convinced that stocks are already in a bear market.