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WHAT THE MARKET WANTS: March 2009

March 2, 2009 5:30 PM   The stock market saw another round of severe selling pressure in February as a tremendous amount of uncertainty surrounding the global economy continues to spook investors. The market had been holding above its November lows and many viewed this as a positive development.

But looking back, this was just a short-term reprieve that allowed sellers a chance to catch their breath and begin to indiscriminately unload stocks again to multi-year lows. The major indices have now posted steep declines in five of the last six months and are down 40-45% during this period.

Clearly, the market continues to price in a rather gloomy outlook for 2009 and beyond. Nothing the government can throw at the market seems to matter, as investors continue to focus on the sluggish economy and the seemingly never-ending troubles in the financial sector. Just today (Mar 2), AIG announced a $61 billion quarterly loss, and this is after the U.S. government pumped $170 billion into the company in just the last six months.

Last week's news that Q4 GDP slumped 6.2% (worst reading in 27 years) is further proof that we are in the midst of the worst recession in decades, and many expect things to only get worse as unemployment continues to trend higher and the American consumer remains pessimistic and skeptical about any quick fix.

Despite all the efforts that the Fed has made to stop the bleeding among the financials and to buoy the economy (over $1 trillion and growing in stimulus), the results speak for themselves. And a growing sense that the overall situation in the U.S. is actually much better than elsewhere in the world is only stoking the anxiety.

The major indices, save for the Nasdaq, posted double digit percentage losses in February. The Nasdaq was down "just" 6.7%, while the S&P 500 and DJIA were off 10.9% and 11.7% respectively. The S&P and DJIA are now 50% below their all-time highs set back in November 2007.

The weakest of the indices we track was the Russell Microcap Index, down 15% in February. Value continues to get trounced by growth on a relative basis. Just in the last three months alone, the value indices are all down about twice as much as their growth counterparts across all four cap segments.

One thing worth noting is that the fear normally associated with bottoms is not present, and this does not bode well. Although the indices are trading at multi-year lows, fear indicators such as the VIX are not even close to their November highs. As is typical with bear markets, stocks continue to chart a slow painful grind lower with intermittent sharp one to two day rallies keeping hope alive.

We continue not to try to call a bottom, and will let the market dictate that for us. Right now, it is telling us to proceed with extreme caution, and expect things to get worse before they get better. The harsh reality is that it seems like every month the elusive economic "recovery" that would give stocks a boost gets pushed further out. Right now, uncertainty reigns, and stocks are behaving accordingly.

However, for patient investors, select stocks continue to offer attractive long-term appreciation potential. The market will eventually turn around, and when it does, look for these stocks to be among the market leaders.

Paul Alvim
Chief Equity Analyst

Next update:  Second week in April.