The Dow has plummeted 25% since Sept. 26 and 17% this week alone.
That does not even include the action on Friday: The Dow plunged nearly 700 points in the first few minutes of trading, recovered most of those losses within 45 minutes, fell more than 550 points again later in the day, went on a monstrous rally in the last hour and at one point was up more than 300 points before finally pulling back again and finishing down more than 100 points. Whew.
So, again, as the dentist asks, "Is it safe?"
In other words, are we finally nearing "capitulation," that fancy word that Wall Street types use to describe what happens once people get all the panic selling out of their system and start buying?
Talkback: When will the stock market bottom out?It's almost impossible to tell. Many have tried to call a bottom in the past few weeks and months (and I will take full responsibility for unfortunately being one of them) and have clearly gotten that call wrong.
But let's try to answer it yet again, with insights from market experts I respect and trust.
The bear caseBarry Ritholtz, CEO of research firm Fusion IQ, wrote in a note to clients yesterday afternoon - before the Dow experienced its huge swoon in the last half-hour - that if the Dow failed to stay above 8,750 that would be very bad news.
Unfortunately, the Dow closed yesterday at 8,579.
With that in mind, Ritholtz suggested that the next support level for the Dow could be the low from the last bear market in 2002...about 7,250.
Another money manager agreed that there could be more downside.
"I'm not so bold to say that this is capitulation. At this point, what you're seeing is that the market is driven by hearsay and fear and it feeds on itself," said Jeff Buetow, managing director at Portfolio Management Consultants, the investment consulting unit of Chicago-based asset management firm Envestnet, which has $90 billion in assets.
Buetow said he thinks the S&P 500 could hit 800, about 10% lower than current levels He said that the markets will remain extremely volatile until the housing market recovers.
Haag Sherman, managing director of Salient Partners, an investment firm based in Houston, said that there is no reason to expect the U.S. and global stock markets to recover until the credit markets thaw first.
He explained that the spread between 3-month U.S. Treasurys and the 3-month London interbank offered rate, or Libor, is so wide that it is showing that the credit markets are in "cardiac arrest."
The 3-month Libor rate, which is perhaps the most important indicator of how much banks are charging each other for loans, hit 4.82% Friday morning while the yield on the 3-month Treasury was just 0.4%. Typically, there is less than a percentage point difference between these two rates, Sherman said.
And with the spread this high, that means banks are showing they are unwilling to take on the risk of lending to each other as well as many businesses and consumers.
"The credit markets have to stabilize before global equity markets will stabilize. Until that happens, you will continue to see a selloff in stocks. And the first sign of recovery will be seen with Libor," Sherman said.
Not everyone is so pessimistic though.
The bull caseDaniel Alpert, managing director with investment bank Westwood Capital, used one C word (capitulation) as well as another (crash) to describe what's going on in the markets. He suggested it might be time to tentatively wade back into stocks.
"By any measure, we are now at the point of capitulation. This is the house cleaning that the market has been procrastinating over for a year," Alpert wrote. "The fundamentals underlying the delayed and extended crash are the same as they were a year ago, even two years ago."
Clearly, the markets are not going to go to zero - even though there seem to be a lot of readers of this column that feel that way. At some point, investors will have to recognize that there are stocks out there that have been unfairly punished and are dirt-cheap bargains.
In fact, it's harder and harder by the day to argue that the market as a whole is overvalued. The S&P 500 is trading at just 9.5 times 2009 earnings estimates.
Francois Sicart, chairman of Tocqueville Asset Management, investment firm with about $6 billion in assets, said he thinks the markets are "right in the middle of capitulation."
Once fear begins to subside, he thinks investors will flock back to big companies with relatively healthy businesses that look attractive.
"This is totally characteristic of an overly emotional reaction," Sicart said. "Valuations are looking pretty good for big companies like GE, 3M and DuPont. There are times in the market where you can buy some of the best companies at extremely decent prices."
Wasif Latif, assistant vice president of equity investments for USAA Investment Management Co. in San Antonio, which has about $41 billion in assets, agreed that this is a good time for investors that can afford to be patient to start hunting for bargains.
"Someone with a longer-term approach should be taking advantage of this and nibbling away at these declines," he said."If you have some additional gunpowder left in terms of cash, then it is a good tactic to look at some quality companies and buy them."
But Latif conceded that as long as investors are fearful, valuations may not matter in the short-term.
"This is not a Benjamin Graham market," Latif said, referring to the father of value investing. "This is a Sigmund Freud market."
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