The 2008 Santa Claus rally was weak to begin with. Wednesday a disappointing report on retail sales from the U.S. Commerce Department seemed to erode any positive momentum that remained for the stock market.

The Commerce Department reported that retail sales dropped 2.7 percent in December. That was more than double the 1.2 percent decline that Wall Street expected. The December decline followed a November fall revised downward to 2.1 percent. The reported decline confirmed earlier reports that this was the worst holiday shopping season since at least 1969.

Major market indices rose in a gradual advance from the third week of November through December. Since the beginning of 2009, those indices saw consolidation of those gains but many investors were hoping that there would be a rebound this week. Unfortunately, the downward slide has quickened instead. Today that slide continued as the market opened significantly lower on weakness in the financial markets.

In a separate report Wednesday, the Commerce Department said businesses slashed inventories by 0.7 percent in November. That was the largest decline in seven years and it marked the third straight month that stockpiles were reduced as companies try to cope with huge declines in sales. Total business sales fell by a record 5.1 percent in November, according to the report.

This is all very significant because consumer spending accounts for two-thirds of U.S. economic activity. And U.S. consumers dominate world consumption. So when people cut back on expenditures, the ripples keep going for a long time.

Below is a price chart of the Dow Jones Industrial Average over the past year. I added the two red lines. The top one shows that the long-term downtrend continues, although the slope might have moderated somewhat. The bottom red line shows a technical support level that was violated on this downturn.

The bottom portion of the chart is a moving average convergence divergence (MACD). It rolled over at the start of the year and is on the verge of going negative again. This would indicate that there is still plenty of downward momentum in the market and it is quite possible that indices could reach or exceed the lows of November 2008.

We continue to hear reports of advisors who are telling their clients to hang on because the market is bottoming at this level. Others are saying that this is a good time to buy because most stocks are priced at least 40 percent lower than they were a year ago.

All technical and fundamental indicators we follow show that market risk remains very high. While it is possible that stocks could be near a bottom at this level, it is also possible that they could fall significantly lower. At this point, we believe that the most prudent course of action is to keep the majority of all assets allocated to a money market position.
F.S.

You requested this Dental Dollars free e-newsletter. Please add support@dentaldollars.net to your e-mail address book to ensure prompt delivery.

This entry was posted on Thursday, January 15th, 2009 at 3:31 pm and is filed under Newsletter. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.