The crisis in the credit markets is derailing the usual year-end optimism for stocks.
The day after Thanksgiving brings shopping, and with Christmas, even more shopping. The holiday spirit typically makes for positive months in the markets, even in challenging times. But this holiday season may be different.
Investors in both bond and stock markets are giving up on trying to find bottoms even in the most beleaguered sectors like financials, opting instead for protective measures like shifting to cash.
"Like it or not, we are in a bear market," says Richard Suttmeier, chief market strategist at
and a contributor to
's sister site
. Suttmeier points in particular to Wednesday's close for the
Dow Jones Industrial Average
at 12,799.04, below its August low of 12,845.78, and 9.6% off from its October high. While the Dow rebounded to 12,980.88 in a half-day of light trading Friday, breaking through that low point creates a "sell signal" for many traders who follow what technicians call Dow Theory.
"You have to keep your powder dry," says Louise Yamada, founder of Louise Yamada Technical Research Advisors, meaning investors may be wise to move their investments to cash. "Preservation of capital here is of the essence."
That may be the current path of individual investors who are growing increasingly bearish. The American Association of Individual Investors survey of investor sentiment shows that 50% of investors are bearish, which is the third highest level this year.
Investors are certainly selling their U.S. equity mutual funds. Mutual fund investors in U.S. equity funds posted an outflow of $4.9 billion in the week ended Nov. 14, according to TrimTabs Investment Research. That marks the highest outflow since the week that ended Thursday, Aug. 16 -- the last time the credit markets imploded. TrimTabs, whose fund is short the market after being bullish through most of 2007, adds that the $21.4 billion year-to-date outflow from U.S. mutual funds is nearing the record annual outflow of $25.4 billion in 2002.
Specifically next week, "the key risk will be the potential for a liquidity squeeze," writes T.J. Marta, fixed income strategist at RBC Capital Markets. He says this liquidity squeeze theme is likely to be in place for the rest of the year as investors flee risky assets before they write investor letters, and financial firms attempt to clear off their balance sheets before the year-end reporting season.
Fiscal year-end markers hit on Nov. 30 for four large U.S. banks. How much these banks, which include
, liquidate in order to wipe their slates clean for 2008 will likely foreshadow a December unwind for the rest of the financial sector.
Measured by the
Amex Securities Broker Dealer Index
, the sector has fallen 27% from its June 1 high.
"The financials are in bear markets," says Yamada. "They had their bull market and we're not going to see it better there for some time."
Marta notes that next week's economic data pose some telling signals for markets on whether recession looms, and the
thinking. The Fed's beige book, or intermeeting report on economic activity, comes out Wednesday, while Fed officials pepper the week with speeches, including one Thursday from Chairman Ben Bernanke.
Tuesday brings November's consumer confidence report, followed Wednesday by a read on business spending with durable goods orders for October. Most economists are expecting declines in both.
Lastly -- as if Treasury Secretary Henry Paulson's new view that the housing recession and upcoming loan rate resets need a united response from the mortgage servicing industry isn't enough to spook investors -- economists are predicting that both existing- and new-home sales, which are reported Wednesday and Thursday, respectively, will decline again.
In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click
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