IV. Technical/Quantitative Data

• From a technical perspective, last week we discussed the 1078-1089 area as potential support for the S&P 500, which approximates a 62% retracement of the 2002-2007 bull market and also the average decline during a bear market. Thereafter, the next significant level we see comes into play around 1060, which is around the August 2004 lows.

So How Painful Has This Decline Been?

• The average stock currently in the S&P 500 is down 38% (index is down less because of its market cap weighting) from its 52-week high and roughly 83% of stocks in the index are down at least 20%. Similarly, over 80% of the S&P subindustry groups are in a bear market. Is there any silver lining in all of this? Perhaps: an astute contact that we recently spoke with who tracks this data, states this is the greatest percentage of groups in a bear market since the market low in July of 2002. Typically in the latter stages of a bear market, there is almost no place to hide as even the prior strong segments succumb to indiscriminate selling pressure. What's also difficult is often the last leg down is the harshest as panic selling sets in (much like in July 2002), which flushes the majority of investors out, and in the process sets the stage for a more lasting recovery.

Food For Thought

• The following statement and chart is from a recent Forbes article: "American households have $7.4 trillion in checking, savings and other bank accounts and money market funds. They have another $4.1 trillion stashed in Treasuries and other bonds. That $11.5 trillion, up from $8.9 trillion (in constant dollars) in 2000, is nearly enough to buy every company in the Wilshire 5000. It's more than enough to pay off every home mortgage."

Source: Federal Reserve, Forbes

• If the Fed cuts interest rates again (as the market currently anticipates), some clients will be earning even less than the already low rates in cash instruments, such as money markets, and Treasuries. HOW LONG WILL THEY STAY THERE? While a high level of cash doesn't provide much of a short-term buy signal, it does indicate that once a fire is lit, there is plenty of fuel to keep it going.

Important Upcoming Reports

The unofficial kickoff to earnings season begins on Tuesday. In addition, Federal Chairman Ben Bernanke will speak to the National Association for Business Economics on Tuesday, and a number of Fed presidents will be speaking at various events.

V. Bottom Line

In the spirit of Dennis Gartman, we don't necessarily know where the market will be tomorrow or next week, but we do believe we'll get through this. Credit markets will take time to thaw, but we view the passage of the recent rescue bill as an incremental positive and we continue to monitor the credit markets for any signs of improvement in lending rates. Investor attention appears to have already shifted to the weakening global economy and earnings estimates that still appear too high. Yet, as we go through this process, where the economy is slowing, earnings are deteriorating, and unemployment is rising, it is important to note that these events, while painful, are normal parts of any business cycle; moreover, the stock market, as a leading barometer, tends to bottom well before improvement is witnessed in most of these indicators.

Many of the ingredients that are typically seen closer to shorter-term market bottoms are already in place, such as indiscriminate selling, dire investment sentiment, oversold conditions, high volatility levels, and a stampede into less risky assets, such as Treasuries and cash. Admittedly, it is difficult to determine what the near-term catalyst will be to help shore investors confidence enough to make them want to buy stocks (it almost always is). Perhaps it could be improvement in the credit markets, a coordinated global easing by monetary banks, or an earnings season which isn't as bad as current expectations.

As a colleague recently stated to us, this is one of the few businesses that when something goes up, people want more of it, and when it goes down, people want less of it. It's the opposite of what we are taught in Economics 101. Nevertheless, it is important to realize that cycles do eventually pass and by acknowledging the economy is probably already in a recession, the employment outlook is likely to see more deterioration, and the earnings picture should witness further deterioration, it helps to bring down expectations to a point where a little bit of good news could go a long way.

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