Following another late day selloff, the S&P 500 closed within one point of its 2008 low at 850.  This is the third time the index has visited this support level in just over a month.  We have been writing that a bottoming process has been underway, and that S&P 840 had strong potential as a short term low for the market (for the Dow Jones Industrial Average, the support level is 7,882).

Many of the classic signs of market bottoms are present today.  For example, fewer and fewer stocks have reached new lows during the recent retests of the low.  On October 10th, the first time the S&P traded down to 840, over 90% of stocks traded that day made new yearly lows (2,900 stocks), and downside volume exceeded upside volume by a 16 to 1 margin.  Then on the November 13th retest, only 776 stocks made new yearly lows.  Today’s retest?  Only 82 stocks made a new yearly low.  This positive divergence suggests the selling pressure is being exhausted.

Much of the breathtaking decline we have seen since August has been attributed to massive forced liquidation of mutual funds and hedge funds.  Data released over the weekend shed more light on just how substantial the flight from equities has been in the hedge fund world. According to Bloomberg, 38 hedge fund managers with over $1 billion in assets under management reported that selling and market declines cut the value of their equity holdings by 30% in the third quarter to $273 billion.  Several large managers cut their equity exposure by nearly 90% to raise cash for anticipated redemptions.

All of this cash will eventually find its way back into the market, fueling a strong rally.  With stocks off 45% from the high just 13 months ago, and nothing but awful economic news all around us, the market needs a catalyst to break the downtrend and entice some of that cash to come off the sidelines.  If the market is able to hold today’s low, equities will be set for a relief rally that could take the S&P 500 to near 1,000.


This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.