Dow Fishes for a Bottom After Breaching 10000

Exactly one week after barfing up its biggest one-day point loss, the Dow Jones Industrial Average is at it again. The most extraordinary federal economic intervention since the Great Depression couldn't keep the blue-chip index from tumbling through the key psychological barrier of 10,000. We were afraid something like this might happen.

Now that the Dow is foundering at levels it hasn't seen in nearly five years, the trillion-dollar question is, of course, How low can it go? On both a fundamental and technical basis the answer isn't very reassuring.

It's hard to believe but a little more than a year and 4,000-plus points ago the Dow notched its all-time closing high of 14146. That was Oct. 9, 2007, spookily enough, exactly five years after the blue-chip index marked it post-tech bubble nadir close of 7286. We don't mean to be overly pessimistic, but current market levels are hardly that far removed from our prehousing bubble past. (See chart.) And the housing bubble only peaked two years ago.

Now that the hypnotizing effect of the bailout working its way through Congress is over, global markets are grappling with the stunning depth of the credit crunch and crumbling fundamentals. The relentless drumbeat of lousy economic data -- higher jobless claims and an epic decline in auto sales being just a couple of recent points -- has investors rightfully terrified. It's hard to believe third-quarter earnings season, which kicks off Tuesday, will provide many positive catalysts.

Technical analysis, which attempts to predict future movements by charting past trading variables like price and volume, paints a likewise abysmal picture. Now that the Dow has breached the 10,000 barrier, there's theoretical support at 9500 to 9800, according to Barry Ritholtz, chief executive and director of research at FusionIQ. But then there's also a better than 50% chance the average will work its way down to 9000, he wrote.

If losing another 8% to 9% from Monday's levels seems just too painfully inconceivable, consider that investors were more bearish when the market tanked on other occasions earlier this year. Bespoke Investment Group, an asset-management and research firm, points out that sentiment readings are actually less bearish today than back when the S&P 500 was 12% higher. That's bad. Bottoms are formed when bearish sentiments hit extreme levels, meaning, according to polls at least, we still have a ways down to go.

Between fundamentals and technicals, this is no time to try and catch a falling knife. Bear market rules apply: Sell into rallies, beware of bottom-fishing and don't look down on cash.