"The Devil's Arcade"

That's how one trader described the stock market today. It was ugly any way you look at it. By the close, the Dow had shed 306 points and the S&P 500 was off -2.9%, closing well below its 2007 bottom. The day did not start off so badly - in fact the benchmarks were up slightly in the first half-hour despite an announcement from Merrill Lynch (MER) that 4Q profits would be half of what analysts had estimated. The real fun began when the Philadelphia Federal Reserve Bank released its regional survey of manufacturing conditions at 9:00 CDT. Just about every sector turned lower at that point and the rest of the day was a steady downward slide.

The Philly Fed's report did not really tell us anything new. We learned that the economy is weak and recession is likely. Everyone was already aware of that. So why the big sell-off? We have a guess. In the last week we've noticed a number of previously bearish investors conclude that the market has bottomed out. They base this on the widespread bearish sentiment shown by various surveys. The problem is that investor sentiment can easily go from "bad" to "worse." It is safe to say that the bottom is closer now than it was yesterday. It is not safe to say that the bottom is here.

While practically every industry sector was off today, the biggest losers were basic materials and financial services. The defensive sectors we have been holding did better than most.

Because Monday is a market holiday to observe MLK Day, our next update will come to you on Tuesday, January 22.