5 Reasons the Market Could Fall Further

The beatings are likely to continue on Wall Street after one of the most frightening trading days in a long, bearish season.

Today's shudder started with early-morning fright when premarket trading was halted on the New York Stock Exchange following a drop of 550 points—6.5 percent—in Dow futures. Stocks opened down about 450 but staged a modest comeback after what analysts were calling "Black Friday" in equity markets around the globe.

Stocks are still bouncing around their lows for the year—a dangerous place to be until markets get some confirmation that it really is a bottom. Unfortunately, the coming days don't appear to offer much in the way of hope for a quick recovery, even given what has become one of the worst trading months in decades.

The problem is this: Equity traders are still largely blinded by problems in the credit markets even as weakness in the economy and corporate America continues to creep into an already chaotic scene. That's nothing new. However, the longer heightened levels of uncertainty continue, the greater the damage. When the smoke clears, traders could be disappointed even further.

Here are five reasons why shares could fall some more:

Stocks Haven't Bottomed
The best news today is that most indexes didn't breach intraday lows set on October 10. The bad news is we're still testing them. (For the record: Intraday lows on that day were 7884 on the Dow and 840 on the S&P 500.) Even after most markets crashed by more than 25 percent in the past month, the longer we spend bouncing around lows amid huge volatility, the longer daily trade will remain a white-knuckled ride.

The Dollar's Rise Is Fear-Fueled
While world markets sink, the dollar is continuing to climb. While that's great for American purchasing power, the disconnect going on in currency markets right now is a big part of what's keeping traders spooked. The yen is rallying hugely too, hitting a 13-year high against the dollar today. The rise in both comes thanks to cash fleeing riskier markets around the world and seeking out the safe-haven currencies.

The Global Recession Looms
The drop in the stock market made its way around most of the globe before hitting the United States. Japan, Germany, and Britain all watched with horror as their stock markets slumped close to double digits in a single day. It's a loud hint that the problems in credit and the economy that sent U.S. markets into the tank over the past several months are not a local phenomenon. Also, Britain's GDP shrank 0.5 percent in the quarter, a sign that a '90s style recession is in the works. The sterling had its worst day against the dollar in 37 years. For American investors, it's the latest confirmation that hoped-for export growth won't do much to boost U.S. sales as the entire globe suffers an economic slowdown. Two other points there: Gold and oil prices continue to drop as commodity demand says a global slowdown is already here.

Earnings Are Still Falling
You hear a lot about how stocks are cheap these days, but whether you think that's true depends on whether you trust earnings estimates. Today, Sony and Daimler scaled back their earnings forecasts. So far, the third quarter has been a season of lowered expectations as analysts slash their 2008 and 2009 forecasts. And even after all of this, markets may not be cheap yet: Mark Hulbert at MarketWatch notes the history of price-to-earnings ratios show stocks don't necessarily look cheap at these levels. Using as-reported, trailing 12-month EPS, P/E ratios have been higher than they are now only 21 percent of months since 1871. That means stocks now are more expensive than 79 percent of the months going back 138 years. Tough odds, those.

Credit Refreezes
Schadenfreude was flying yesterday after former Federal Reserve Chairman Alan Greenspan said he was "shocked" at the credit market "tsunami" and admitted he was "partially" wrong not to regulate some of the securities that caused the problem as they evolved on his watch. His admission came during the first week in months that frozen credit markets showed early signs of a gradual thaw—until last night. The sell-off put the fear right back into banks, as the Libor lending rate jumped 7 points overnight to 1.28 percent. It looks as if we've taken a step back. A loss in confidence between lenders around the globe was beginning the slow process of reversing itself for most of the past week, and that improvement was viewed as a first step on the road to recovery. That has now stalled in various corners of the credit market. Investment grade debt is weakening, too.

Volatility Signals Confusion
Market volumes were about average despite the swings, but fear is still sending indexes whipsawing. The VIX index, Wall Street's "fear gauge," hit a record high of 81.17 when the market hit its current low on October 10. It traded near 86 at the open before falling back as the market's worst fears went unrealized. Six months ago, the VIX was around 20.