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Market stands ‘corrected’

Stocks took it on the chin again late in Monday’s session, as investors dumped shares across a broad range of companies.

The Dow Jones industrial average plummeted 237.44 points, or 1.8 percent, to 12,743.44.

Based on daily closing prices, the Dow and the Standard & Poor’s 500 index reached 10 percent declines from their Oct. 9 highs, a move known on Wall Street as a “correction.” It was the first such correction since the late winter of 2003.

In turn, Treasury securities reached their best levels since the summer of 2005, reflecting widespread investor flight from risk and disenchantment with every sector of the market.

The repetition of headline-grabbing market declines so far this month appears to be having self-fulfilling impact on investor sentiment.

Would-be stock market investors these days are like people prone to panic attacks, said Jack Tilton, technical analyst at Channel Trend. “When in the middle of the night with the wind howling do you decide to open that closet door?” he said.

Most of Tuesday’s scare in stocks occurred in the last two hours of trading, after the Dow had traded just above or below its Friday close for much of the day. It was the seventh triple-digit loss for the Dow this month, against three daily gains of more than 100 points.

Once again, banking stocks led the decline, as investors continued to agonize over the fact that no one knows the extent of the problems in the housing and mortgage markets. Citigroup fell $1.00, or 3 percent, to $30.70. Rumors swirled that the nation’s largest bank would lay off thousands of employees.

But even so-called defensive sectors, such as consumer goods, health care and utilities, closed lower.

With the Dow off more than 8 percent in a little more than three weeks, seasoned market analysts are looking for a signal to buy. But they’re not finding it.

One potentially upbeat signal is the deep pessimism among individual investors. Traditionally, negative sentiment among ordinary investors indicates that stocks are due to rebound.

A monthly survey of investor sentiment by UBS and the Gallup Organization reached its lowest reading this month since the immediate aftermath of Hurricane Katrina in September 2005.

“Individual investors are really bearish,” said John Kosar, a technical analyst at Asbury Research. “Usually, when they are really bearish, you get a bottom.”

As a result of sentiment indicators and other traditional factors, “we think we’re going to get a near-term bounce here,” Kosar said. “People will call it a Santa Claus rally. But after we get this near-term bounce, we’re probably going to go lower.”

On the other hand, if the current downdraft takes the benchmark S&P 500 below 1370, even a short-term rally could be out of the picture, he said. The index closed Monday at 1407.22, off 33.48 points, or 2.3 percent.

Researchers at Bespoke Investment Group counted 45 corrections of at least 10 percent in the S&P 500 since 1945. The duration of the declines has grown shorter since 1990, to 88 days from an average of 146 days between 1945 and 2007. The number of days that expire between reaching a 10 percent decline and the low point of the slide also has shrunk, to 43 days from 68 days.

The principal fear driving stocks lower is that the current outlook of sluggish economic growth in the fourth quarter could turn into a recession, generally defined as two consecutive quarters of negative economic growth.

But stock market downturns are not good predictors of recessions. Sam Stovall, chief investment strategist at Standard & Poor’s Equity Research, says the U.S. economy has suffered 11 recessions since World War II. But during that period the stock market has witnessed 49 “pullbacks” of 5 percent to 10 percent, 16 “corrections” of 10 percent to 20 percent, and 10 “bear markets” of more than 20 percent declines.

Trends in the three stock sectors — consumer goods, health care and utilities — that tend to do well during recessions might be sending more convincing signals.

“That’s where people go to hide when things are scary,” Kosar said. Shares of consumer goods manufacturers, such as Procter & Gamble, have performed better than the overall stock market since April 2006.

“It states the obvious, perhaps,” said Tilton. “The defensive nature of the [consumer goods] sector is certainly there. It looks like they might have some ways to go.”

The health-care sector, represented by such stocks as Bristol-Myers Squibb, has done less well in rewarding worried investors. It has done worse than the overall market since September.

“But it has picked up lately,” Tilton said. “It is now demonstrating those defensive characteristics, but maybe a little less emphatically than consumer goods.”

Finally, utilities, a perennial port in the storm, have done so well this year that investors who own them might consider lightening up, Tilton said.

Along with Treasury securities, “if you’re holding [utilities], you’re playing on emotions going even further, which today seems like the right path,” Tilton said.

Kosar said he’s watching technology stocks, which rallied from mid-August to mid-October, providing fuel for the market’s late summer rally.

In mid-August, after the last big sell-off in stocks, investors grew optimistic about technology stocks. They did not seem to be affected directly by the problems in the housing and mortgage industries.

But the tech rally hit a wall in early November, when Cisco Systems warned that an economic slowdown was hurting its computer networking business.

“Technology is still overextended versus the broad market,” Kosar said.

In Monday’s trading, the Nasdaq composite index, which is dominated by major technology stocks, fell 55.61, or 2.1 percent, to 2540.99.

“If there is a near-term rally you’re going to see technology is going to get a boost,” Kosar said. “If people think stocks are bottoming they are going to want to jump on the fastest horses. But if the Nasdaq stays weak versus the S&P 500 going into next year, things will not be good.”

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bbarnhart@tribune.com