What is wrong with the stock market? Part I

Global stock markets went through two weeks of very bloody, gut-wrenching sessions. The Dow Jones Index (DJI) lost almost 2000 points in 3 weeks. Going through the last 10 sessions was like fumbling your way through a multi-level deep dark tunnel. As soon as you thought you saw the end of the tunnel, you stumbled into a deeper, darker hole. Triple-digit deep red figures were intertwined with only two very small greens. To make it worse, DJI stumbled over 600 points (5.5%) yesterday, sending the market into a full-blown panic. VIX, a gauge of fear, surged to 48, a level unseen since the flash crash.

"Is this the bottom?"

This is the multi-trillion question that is on the mind of every other person, be it someone who is enduring pain in the stock market or who has plenty of cash set aside waiting to invest. For a few days, yesterday may have found the bottom for the market. In fact, if the Fed Chair, Bernanke can give a little bit more than just a rhetoric like the one given by President Obama, the extremely oversold market may very well recapture 300-500 points in a couple of days. However, the development beyond a few days is far more difficult to conjecture. It all depends on what kind of rabbits the Fed and hopefully, the government, pulls out of their hats.

"What is the problem? "

What is more worrisome than not knowing the answer is not knowing the question. Not many people out there can tell exactly which problem is at the core of this precipitous fall. Therefore,  one cannot tell whether it is a bottom until he knows which rabbit should be pulled out of the hat to be a solution.

There are three problems that are cited by most as causing the sell-off. The list may expand.
1. Europe debt crisis
2. The worry that the US economy maybe  heading at a double dip, and bringing the world with it.
3. S&P downgrade of US government debts

Which one is it? Until we ask the right question, we cannot hope for a right answer.

Economic Slowdown?

July manufacturing and non-manufacturing survey released by the Institute of Supply Management (ISM) pointed to a worrisome  outlook of the economy.

On August 1, 2011, the market took a sharp dive soon after the debt-deal relief rally. The sharp dive coincided with a shocking ISM manufacturing index for July that came in at a disappointing 50.9 vs a 55.3 reading for June. Although any reading above 50 indicates monthly expansion in business conditions but the reading  is now at the slowest rate so far of the recovery. Most troublesome are new orders and backlog orders data. New orders at 49.3, a little below break-even 50, indicated a contraction. This is the first sub-50 reading since June 2009.Backlog order dropped to the territory of contraction to 45.0 for the lowest reading since April 2009.These two figures pointed to more slowdown in manufacturing in coming months.

The ISM non-manufacturing pretty much echoed the
 manufacturing counterpart.A second month of slowing
in new orders and deepening contraction in backlog orders undercut strength in the ISM non-manufacturing composite index for July that edged only slightly lower to a 52.7 level that indicates moderate monthly expansion compared to June. New orders, which were in the 60s as recently as March, fell nearly two points to 51.7 and are now testing the monthly breakeven level of 50. Backlog orders are already well below 50, down 4-1/2 points in the month to 44.0. Weak orders do not point to overall strength in the months ahead.