Historically, the best time to buy stocks has been when things looked bleakest. They were looking pretty bleak early Monday and some buyers did emerge. That helped pare some potentially extensive losses, but couldn't prevent major averages from suffering sizable declines today, and for the month and quarter.
After trading as low as 7460.78 early on, below its July 24 intraday low of 7532.66, the
Dow Jones Industrial Average
spent much of the day climbing, coming within 30 points of break-even until faltering again in the final 30 minutes of trading. The index closed down 1.4% to 7591.58.
Following similar patterns, the
closed down 1.5% to 815.26 after having traded as low as 800.20, and the
ended down 2.3% to 1171.93 vs. its early low of 1160.07.
Nearly 1.75 billion shares traded Monday, or 13% above the three-month daily average volume,
reported, while 1.5 billion shares were exchanged over the counter. However, breadth figures only modestly favored declining stocks and the increase in volume was more due to mutual funds' month- and quarter-end considerations than any kind of capitulatory selling.
September lived up to its billing as the worst month for stocks with the Dow falling 12.4%, the S&P losing 11% and the Comp declining 11.9%. The month's decline was the worst for the S&P 500 since August 1998.
The Dow fell 17.9% in the third quarter and the S&P lost 17.6%, the worst quarterly decline for each since the fourth quarter of 1987. The Comp lost nearly 20% in the just-completed third quarter.
The monthly and quarterly declines for the major averages demonstrated once again the folly of investors' repeated attempts to pinpoint a bottom. More ominously, they disabuse the idea that the best time to buy is when things look worst, if only because recent history has shown stocks can go from terrible to awful and beyond. That should also serve as a cautionary note to the many investors who continue to believe that sentiment is overwhelmingly negative, and thus a contrarian argument for why stocks should rally.
Today, the CBOE Market Volatility Index rose 3.3% to 44.57 while its Nasdaq counterpart, the Nasdaq Volatility Index rose 0.8% to 58.35.
Notably, the VXN was higher on March 27, 2000, ending the day the Nasdaq peaked at 61.69. Some might argue the market is expecting less future volatility from the Nasdaq today vs. March 2000 but "the higher the VXN, the more willing option traders are to overpay for
QQQ puts relative to calls," according to Phil Erlanger of Erlanger Squeeze Play. "We need to see levels in the VXN above the 70 to 80 range to achieve the level of fear and hatred we associate with bottoms."
The VIX was trading in the low 20s in March 2000, well below today's levels. But other observers such as
Bernie Schaeffer of Schaeffer's Investment Research believe the volatility index also must produce extreme levels -- it exceeded 170 during the 1987 crash -- before a true bottom arrives.
In sum, little that occurred today, in September or the third quarter, suggests the market is ready to reverse its steep downward trend, although sharp trading rallies can emerge almost any time. Recall that a solid rally in August, sandwiched between steep losses in July and September, was cited by many observers as evidence better times had (finally) arrived.
All Systems Not Go
reported earlier, today's decline was precipitated by a government report that personal spending rose just 0.3% in August, vs. 1% in July and expectations for a rise of 0.5%. The report raised concerns the previously profligate U.S. consumer may finally be retrenching, something cautious guidance from
, as well as weaker-than-expected results from
confirmed. The S&P Retail Index fell 4.2%.
Separately, the Chicago Purchasing Managers survey for September was weaker than expected, showing contraction in the region's manufacturing for the first time since January and signaling no recovery in business spending.
A lawsuit filed by New York Attorney General Eliot Spitzer against several chief executives who received IPOs from
Salomon Smith Barney unit, and now rote worries about war with Iraq also weighed on shares today.
As stocks struggled, the price of the benchmark 10-year Treasury note rose 16/32 to 106 13/32, its yield falling to 3.6%. Meanwhile, the price of the two-year note gained 7/32 to 100 12/32, with the yield falling to 1.68%, which is below the 1.75% fed funds rate. That is an indication market participants believe the
will lower rates, likely prior to its next scheduled policy meeting on Nov. 6.
Indeed, such expectations were cited as a catalyst for the market's midday rally attempt. However, the fed funds rate has been at 1.75%, a 40-year low, since December 2001, and it is dawning on some participants that a lower fed funds rate isn't necessarily the panacea for what ails this economy.
Some alternatives to more Fed easing come from John Lekas, who runs $250 million at Portland, Ore.-based Leader Capital. As reported
Friday, Lekas believes a sharp increase in bank writedowns of nonperforming losses is a necessity to clean up the postbubble excesses. At present, Lekas' fund is 100% in cash.
"That shoe may drop before or after the dollar weakens," but a weakening greenback is another of Lekas' somewhat unconventional cures. Today, the Dollar Index fell 0.69 to 107.26 amid a big rally in the Japanese yen.
Lekas predicted the dollar will fall another 15% to 20% in the next six months, causing interest rates to rise and force U.S. banks to write-off their nonperforming assets rather than extend terms. The silver lining in this otherwise troubling scenario is it will also increase the attractiveness of U.S. exports. "To get sales up and the economy going we're going to make it on exports to Southeast Asia and Japan," the money manager argued. "The only way that can happen is if the dollar drops -- you can count on it."
Countries such as Thailand and South Korea "paid their dues" in the late 1990s and that Japan's economy is approaching a bottom, Lekas believes, suggesting the cyclical nature of economics augurs well for that region and poorly for our hemisphere.
The notion Asia will be the proverbial engine of growth for the world economy is counterintuitive to what most of us have come to expect. But "if it doesn't happen, I'll see you on the breadline," Lekas quipped.
After this past quarter, nobody's laughing on Wall Street.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.