Going to Test the Lows

S&P 500 Index's `Retest' of Low Fails to Spur Rally (Update1): “The Standard & Poor's 500 Index is poised to extend this year's 42 percent drop after a rally from last week's five-year low lasted just one day, say analysts who study charts of trading patterns and prices to forecast changes in stocks.

After rebounding 11 percent Nov. 13, the benchmark index for American equities slipped 6.6 percent during the last two days and will probably keep falling past 818.69, its lowest level since 2003, according to three top-ranked technical analysts. The S&P 500 declined below its Oct. 10 low of 839.8 before rallying last week, making it a “retest” to chart readers.

“Historically you would've had a better charge from the bulls at this point, and it hasn't developed,” said Jeffrey de Graaf, a senior managing director at ISI Group Inc. in New York, in a telephone interview. “The buyers haven't presented themselves in a meaningful way to show that there's a sustained move to the upside, so the concern is that you just drift here.”

The 11 percent trough-to-peak gain in the S&P 500 on Nov. 13 was one of six “key reversals” in the past 40 years, according to de Graaf, who defines the term using intraday levels and moving averages. Its 4.2 percent retreat a day later was the worst showing after such a turnaround by a factor of seven, he said.

Technical Analyst

De Graaf, the highest-rated technical analyst in Institutional Investor magazine's survey the past four years, said other indicators suggest stocks will keep falling. They include declining stocks outnumbering rising ones; higher trading volume when the market is falling than when it's rising; and two-year Treasury note yields near record lows at 1.17 percent, an indication investors are seeking to avoid risk.

The S&P 500 tumbled 44 percent this year to a five-year low on Nov. 13, and dropped 48 percent from its October 2007 peak, according to data compiled by Bloomberg. Stocks were dragged down by almost $1 trillion of writedowns and credit losses at financial companies globally stemming from the collapse of the U.S. subprime mortgage market.

The index is headed for its biggest annual decline since the Great Depression, when it fell 47 percent in 1931. Of the 30 stocks in the S&P 500 that traded at $100 or higher at the peak, 24 now trade under that threshold, and eight fetch less than $50, according to data compiled by Bloomberg.

`Final Low'

The Nov. 13 slide pushed the S&P 500 below its previous intraday low for the year on Oct. 10. The gauge fell 2.6 percent yesterday, while futures on the index today lost 1.8 percent as of 11:21 a.m. in London.

“The final low will be much lower than this,” and may not occur before the fourth quarter of next year, de Graaf said.

At a minimum, stocks are likely to revisit their lowest levels of 2002 and 2003, when a 51 percent slide from the March 2000 peak sent the S&P 500 as low as 768.63, said Mary Ann Bartels, chief market analyst at Merrill Lynch & Co. in New York.

“You need patience and a lot of time to build a base” from which the market can rally, said Bartels, who ranked second in the Institutional Investor poll this year. “This is still a very young base. If you want to use a football analogy, we're in the early part of the first quarter.”

The process can take from five months to a year, and is likely to take a year this time, Bartels said. One indication is a proprietary measure showing sellers driving volume rather than buyers, she said.

“What we need is buyers to come back into the market and we don't have that,” she said.

The S&P 500 is likely to fall to around 680, 20 percent lower than yesterday's close, probably by the end of the year, said John Roque, senior technical analyst for New York-based brokerage Natixis Bleichroeder Inc.

“Every low hasn't held yet, so why should I assume this one's going to?” Roque said.”