As if things weren't bad enough, Wall Street is racing into August, which is one of the worst months for stocks. But the good news is August is also a time of major turning points for the market.
First the bad stuff. Since 1950, the Dow Jones industrial and the Standard & Poor's 500 indexes have lost, on average, 0.19 percent and 0.39 percent respectively, in August, according to Elliott Wave Theorist, a stock market tracking firm.
Between 1964 and last year there were 17 "down" months of August.
But August has set the stage for market recoils when Wall Street has screamed "enough is enough already."
The shortest bear market in history, a snappy 45-day slide, ended in August, 1998 when fears the Russian financial crisis would set off a knock-on effect on the global economy subsided. And investors' nail-biting over the Gulf War stopped in August, 1990, according to the Stock Trader's Almanac.
Fast rewind to August, 1982. The Dow racked up its biggest gain, a whopping 11.5 percent explosion. Then there's August, 1984 when the blue-chip index had an impressive leap of 9.8 percent. Both surges signaled the end of bear markets, says the Almanac.
This year's August performance will be closely watched by anxious investors. The market's horrific selloff has made a lot of people sick and tired of losing money in stocks. Since June the Dow has lost nearly 2,000 points.
Analysts are wheeling out theories about the market being oversold. Some bottom-spotting indicators point to a turnaround, they say.
The white flag of surrender may be going up after investors have unloaded truck loads of stocks and pushed the market to a 5-year low. By some estimates, $15 billion have exited stock mutual funds in the past six weeks.
Such broad-based selling has often been a sign of "capitulation" when the last bulls throw in the towel and take their marbles home.
LABOR DAY RALLY?
"In spite of August's relative weakness, traders might find trading opportunities during the last three days before Labor Day," says James Dines, publisher of the Dines Letter, an investment publication. "The Dow has been up 28 out of 41 years for a 68 percent bullish track record."
This year the long U.S. Labor Day holiday weekend falls on Aug. 31-Sept. 2. So the $64,000 question is whether August will mark the end of the nauseating stock plunge. Then again, a rebound may turn out to be just a bear-market rally.
Whoever gets the right answer, gets the pot of gold.
In the current difficult market environment, it's unclear if stocks have reached a healthy bottom. Historically, panic selling is reflected when daily trading volumes surge to levels three times or more the previous month's daily average. In rough terms, a climactic sell-off -- daily trading volumes of three billion shares or more for the New York Stock Exchange and in excess of 5.5 billion for the Nasdaq -- could be seen as a signal that everyone has given up.
There's also the possibility the capitulation may take place on low trading volumes because the market has gone through such a slow-motion erosion over the last 2-1/2 years.
While investors' jitters may not be over, one thing is apparent. Investors are tired of getting battered and of reacting to the constant stream of disappointing news about the economy, corporate earnings and boardroom scandals.
At some point, people won't be as overwhelmed by nasty surprises and they will start to anticipate an economic recovery. Typically, stocks turn at least six months before corporate earnings begin to improve.
What may happen is that next year some of the biggest corporate losers may still report lousy results, but their red ink will be less disturbing than a year earlier. It may be a case of looking back at a really horrific period and seeing things are slowly getting better.
Historically, the market has discounted the future months ahead of a turnaround. But the mind-set right now is to concentrate on pricing into stocks what else could go wrong with the accounting scandals, earnings and the economy.
END OF BEAR MARKET MAY NOT SIGNAL BULL RUN
Buyers beware. After the last bear has left the building, people should not expect a big wave of emotional buying that will ignite the next bull market.
Trillions of dollars of retirement money has gone up in smoke. Even high-octane investors with intense risk tolerance may shun former high-flying stocks, such as technology companies, that were the stars during the Great Bull Market of the 1990s.
"In spite of our view that a meaningful tactical rally is in the cards, we would be wary of misinterpreting it as being the beginning of a new secular bull-market phase," says Salomon Smith Barney.
There is one telltale sign that corporate America is slowly getting back on its feet.
Dividend payouts for the Standard & Poor's 500 companies made a surprisingly good showing in June, jumping more than 50 percent from a year earlier and are up 4 percent in the first half of the year, according to Standard & Poor's.
In 2000 and 2001, dividend payments posted their first back-to-back slide, something that hadn't happened since the nasty investment environment of 1970 and 1971. S&P forecasts a rise of at least 2 percent this year.
BRIGHTER FOR DIVIDENDS
"Corporate earnings are likely to strengthen in the second half as the economy picks up speed, which should make the
dividend picture even brighter," says Joseph Tigue, managing editor of S&P's "The Outlook," an investment letter.
Tight-fisted companies are loosening up their purse strings after downsizing or eliminating their dividends during the roaring bull market. Now that their stocks are on the ropes, companies are bringing back their dividends because they need to attract investors.
Some of the biggest names have cut dividends. One of the most shocking was Corning Inc. the world's largest maker of fiber-optic cable, which did away with its dividend after rolling out a steady stream of payments through wars and economic depressions since the early 1880s.
"With the focus on capital appreciation, corporations held back their dividend and instead rewarded their stockholders via share buybacks, which reduced the number of shares outstanding and thus boosted per-share earnings," says Tigue.
Time to buy stocks with both hands? Only time will tell.
For the week, the Dow was down 7.8 percent to 8,019, the Nasdaq slumped 4 percent to 1,319 and the S&P 500 slid 8 percent to 848.