Wednesday, October 1, 2008

September 2008 Rewind - Bailout Hysteria

This September, equity indices around the world posted a series of daily declines of a magnitude not seen since 9/11 2001 and Black Monday 1987. The S&P 500, Dow Jones Industrials and NASDAQ 100 cash indices closed the month down -9.21%, -6.00% and -15.38%, respectively. Year-to-date, that leaves these indices down -20.68%, -18.20% and -24.00% below their respective 2007 closes.

The bad news was relentless, starting with the closure of Ospraie's flagship hedge fund; continued oil declines even in the face of Hurricanes Gustav and Ike; the seizure of Fannie Mae and Freddie Mac; the federal loan to AIG; failure and sale of Lehman Brothers, Merrill Lynch and Washington Mutual; broken money market funds; unemployment levels not seen in five years; record home price declines; and a downward GDP revision. Then came the $700B liquidity reconstitution plan a.k.a. "Wall Street Bailout" and associated slew of free market interventions.

While the end of that story remains to be told, the failure of the congressional vote together with hedge fund skittishness ahead of redemption season led to the now infamous 777 point drop in the Dow Jones Industrial Average on the 29th. That Monday, the VIX approached 50 for the first time since the crash of the Internet bubble as nearly one trillion of market capitalization evaporated.

Even in the midst of these dark economic times, some bottom fishing was observed by the likes of Warren Buffet (GS), while Microsoft and others announced the resumption of stock buyback plans.

Last month, Style-Box performance showed relative strength in the Value quadrants, with Consumer Staples and Financials performing best among the Sectors. As we head into the traditionally strong time of year for equities, it will be curious to see how the ultimate passage and form of the rescue plan affects what remains a tight lending environment, and coincidentally weighs against the political uncertainties of the national elections and near certain reduction in earnings forecasts.

Sentiment: Highly-Negative
Volatility: Extended (VIX 20-48)
Direction: Down

[Click to Enlarge; Additional ETF Analyses Posted on Market Rewind]

The Style-Box was calculated using the following PowerShares™ ETFs: Small-Growth (PWT), Small-Value (PWY), Mid-Growth (PWJ), Mid-Value (PWP), Large-Growth (PWB), and Large-Value (PWV). The Sector-Ribbon was calculated using the following Select Sector SPDR™ ETFs: Materials (XLB), Industrials (XLI), Energy (XLE), Staples (XLP), Discretionary (XLY), Financials (XLF), Technology (XLK), and Healthcare (XLV). The Standard & Poors 500, Dow Jones Industrial Average and NASDAQ 100 may be traded through ETF proxies, including the SPY or IVV, DIA and QQQQ, respectively.

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