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Markets Didn't Hear Anything They Liked

Greenspan and O'Neill's measured testimony doesn't stop averages from hitting their lowest levels since October 1998.
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SAN FRANCISCO -- Neither yesterday's late-session bounce nor comments from

Federal Reserve

Chairman Alan Greenspan and Treasury Secretary Paul O'Neill proved sufficient impetus to inspire buyers today. Thus, the selling resumed.

A mid-afternoon rally attempt faltered soon after it started and major averages closed at session lows with the

Dow Jones Industrial Average

falling 4.4% to 8376.21, the

S&P 500

shedding 3.1% to 984.54 and the

Nasdaq Composite

sliding 3.7% to 1470.93.

Major averages are at their lowest levels since October 1998 and technical analysts are now looking at the lows of that month -- 7400 for the Dow, 923 for the S&P and 1357 for the Comp -- as the next major areas of support for the beleaguered market.

In both his

prepared remarks and the question and answer session before the Senate Banking Committee, Greenspan suggested it will take some time to determine the real financial impact vs. short-term disruption caused by the terrorist attacks.

"Nobody has the capacity to fathom fully how the tragedy of Sept. 11 will play out," Greenspan said. Thus, "while there is obviously a strong desire to move rapidly, it is far more important to be right than quick."

O'Neill expressed a similar view. He testified that while all forms of stimulus are being considered, the government shouldn't rush into action.

From an economic point of view, a measured approach makes sense. In addition to fiscal and monetary stimuli enacted prior to Sept. 11, Congress has since approved $40 billion in emergency spending;, the Federal Reserve has eased by another 50 basis points, adding a tremendous amount of liquidity into the system -- although Greenspan noted the "temporarily bloated balance sheet of the Fed is now shrinking back to normal."

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Furthermore, had Greenspan or O'Neill appeared overwrought about the economy's prospects, commentators (myself included) likely would have criticized them for overreacting and/or fueling panic. So it could be argued the economic chieftains faced a no-win situation, because investors looking for recommendations of bold action were similarly disappointed.

Greenspan and O'Neill each expressed optimism about the economy's long-term prospects, which is rational, based on history, according to Anthony Crescenzi, chief bond market strategist at Miller Tabak. "But it's difficult for investors to hold the same degree of optimism," Crescenzi commented at

Bond market participants also struggled to find reasons for optimism today, although for different reasons than equity investors. The price of the benchmark 10-year Treasury note fell 13/32, its yield rising to 4.74%.

Greenspan declared the "prospects for continued rapid technological advance and associated faster productivity growth are scarcely diminished."

But this oft-repeated theme may no longer be so assured, Crescenzi noted. "Continued strong productivity growth is dependent upon the continuance of long-term trends, trends that may have been interrupted by the tragedy."

Putting Money Where Your Mouth Is

On the other hand, Dave Hunter, chief market strategist at Kelly & Christensen, a small brokerage firm on the floor of the

New York Stock Exchange

, has long viewed the Fed as being behind the curve, recently suggesting its "misguided policy had us heading into the worst economic downturn this country has experienced since the 1930s."

But the record amount of liquidity the Fed has injected into the system in the past week "is as close to a guarantee as you can get in this business that a big upside move is just around the corner," Hunter commented today. "I do think Greenspan and O'Neill could have shown more of a sense of urgency to show the markets they get it. Fortunately though, unlike the reassurances Greenspan has offered throughout the past year, this one is backed up by an unprecedented amount of new money into the system

which is much more important than jawboning."

The ever-elusive bottom is rapidly approaching, the strategist said, suggesting today's losses were an expression of the market's "need to finish discounting the bearish view and all the fallout from last week."

Because this "final selloff phase is a vertical decline" it's impossible to determine when the actual bottom arrives until after the fact, he continued. But "because of the massive liquidity injection, the market will have a V-recovery mirroring the decline. So if you buy ahead of the bottom by a few days, you'll recoup any losses very quickly."

Of course, that assumes investors were able to avoid the losses this week, much less in the past 18 months, and have cash on hand to buy.

Still, one could argue that elements of a bottom were evident today in the reportedly forced selling of 135 million shares of


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by the Bass family, in conjunction with the market's downturn amid frightful market internals.

The more the market falls, the steeper any reflexive rally is likely to be. But those contemplating a V-shaped recovery should consider the following: In the four days since trading resumed, the Dow has fallen 1229.23 points, or 12.8%, while the S&P has lost 108.05, or 9.9%, and the Nasdaq 224.45, or 13.2%.

Given that a fairly substantial advance is necessary just to get back to the pre-Sept. 11 levels, a

W-formation -- where the first rally attempt is met by another downturn -- is looking more and more likely.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.