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New lows risk sparking a deeper sell-off as bulls give up

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The bear took another devastating swipe at stocks today, driving most major U.S. market indexes to their lowest levels in at least five years.

In other words, the market plunge didn’t end in October, as many people obviously were hoping.

The Dow Jones industrial average sank 427.47 points, or 5.1%, to 7,997.28, barreling through the previous closing low of 8,175.77 set Oct. 27.

The Standard & Poor’s 500 index, which slid 6.1% to 806.58 today, now is down 48.5% from its record high reached in October 2007. It doesn’t have much more to go before it eclipses the 49.1% drop in the 2000-02 bear market -- which was the worst decline since the latter years of the Great Depression.

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The Dow is down 43.5% from its all-time high. The Nasdaq composite, off 6.5% today, is down 51.5% from its October 2007 high.

Not even the blessing of Gene Simmons, famed bassist for the 1970s rock supergroup KISS, could inspire the market today. Simmons rang the opening bell at the New York Stock Exchange. (Why? Apparently just because he asked.)

Now the great fear is that buy-and-hold investors who’ve been sticking with the ‘hold’ part of the strategy -- and haven’t sold anything over the last year -- will decide they can’t take any more pain.

Will new lows unleash a fresh wave of selling? ‘I sure think it could,’ said Richard Sparks, equity analyst at Schaeffer’s Investment Research in Cincinnati.

‘We still could bounce from here, but I don’t know what the catalyst would be for that,’ he said. ‘There’s nothing the market can see as a positive.’

The sell-off today had no particular trigger -- just more of the same: The economy is crumbling, the financial system still is a mess (as shown by another meltdown in bank stocks today) and the nation’s automakers are on the brink of collapse.

The minutes of Federal Reserve policymakers’ Oct. 28-29 meeting, released today, showed the Fed expected the economy to continue shrinking through mid-2009, and maybe beyond.

Normally, the stock market turns around before the economy does. But it may be that too many investors have been betting on that turn coming soon. If you believe that the market can’t bottom until the last optimist has been washed out of it, it doesn’t look like we’re there yet.

From Bloomberg News:

Optimism on U.S. stocks climbed [this month] to the highest in a decade as investors speculated earnings for American companies will weather a recession better than their global rivals, a Merrill Lynch & Co. survey of money managers worldwide showed. A net 36% of the 180 respondents surveyed in November said they were now ‘overweight’ U.S. equities, the highest since at least 1998 and double that of last month. ‘The love affair with the U.S. lives on at the expense of Europe and the U.K.,’ said Karen Olney, head of European equity strategy at Merrill. The average manager ‘really sees the U.S. as being defensive.’

Or at least he did before this week.


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