You're Witnessing the Stock Sale of the Century

The hellish bear market that ended Nov. 20 was phony -- at least in part. A sizable chunk of the 52% decline in the S&P 500 shouldn't have happened. The market should have dropped by 10% to 15% because of the economy and, perhaps, another 10% to 15% for the emotion-based selling that typically accompanies big declines.

Ironically enough, the stock market got smacked more than it deserved because it's damn good at what it does. Other markets were miserable failures, gumming up when they were needed most -- for commercial paper, high-yield bonds, investment-grade bonds, mortgages and CDOs, among others. When other markets became paralyzed, investors who wanted cash turned to a market that stayed open and fully functional: the stock market. There was, of course, one stipulation for sellers of stock: You had to be willing to sell at any price.

Because of the extraordinary damage wrought by liquidity-induced selling, we've just witnessed the worst U.S. stock market in history. Carnage such as the 50% drop in the Russell 2000 in just 45 trading days (ending Nov. 20) has no parallel. Market volatility has been so extreme, it's breathtaking.

The 50-day average change in the S&P 500 reached 4% in November. In years past, a one-day 4% change in the market would be a headline grabber. To average a 4% daily change for several weeks is mind-boggling. The 1932 market got up to a 3.5% average change for 50 days, but all other bear markets are cubs in comparison. Only in 1938 and 1987 did the market volatility get past a 2% average daily change for 50 days.

Don't listen to those who say the 52% loss in the S&P 500 ranks third among bear markets, behind the 1929-1932 and the 1938 bear markets. The 1929 decline started at stratospheric levels, after a skyrocketing 497% eight-year bull market. And, similarly, the 1938 bear started after a 372% six-year bull market. Going into the 2007-2008 mega-bear market, the market was up 63% over the prior six years and even less for the prior eight years.

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At time of publication, Alsin and/or ACM was long Microsoft, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, a California-based investment adviser. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback; click here to send him an email.