Facing up to the downturn

Just 19 more days like Tuesday and the Dow Jones industrial average will be at zero. And we can all start over from scratch.

Stocks were hammered a second straight day by what many traders described as desperation selling.

The Dow lost 508.39 points, or 5.1%, to 9,447.11, its lowest close since September 2003.

We said goodbye to Dow 10,000 on Monday. On Tuesday, the Standard & Poor's 500 index closed below the 1,000 mark for the first time in five years, tumbling 60.66 points, or 5.7%, to 996.23. Today, shares in Asia dropped 8%.

The severity of Wall Street's decline over the last 2 1/2 weeks has been breathtaking. By the classic bear market yardstick -- a minimum 20% drop in a major stock index -- the S&P 500 now has experienced a bear market in just 12 trading sessions: The index has fallen 21% since Sept. 19.

That would be a bear-within-a-bear. Measured from its record high a year ago, the S&P is down 36%, making it the fourth-worst market decline since the late 1930s.

Although investors are fearful because of the credit crunch, selling of this magnitude seems to be disconnected from economic fundamentals.

Art Hogan, veteran analyst at Jefferies & Co. in Boston, noted the relatively uniform percentage declines in broad market indexes Tuesday: 5.4% in the New York Stock Exchange composite index, 5.6% in the S&P small-stock index, 5.8% in the Nasdaq composite.

"That tells you it's just waves of people selling everything that's traded," he said.

Who is so desperate to get out? Many analysts point to hedge fund managers, who are believed to be facing another round of massive redemption notices from clients who want their cash back. "You're seeing selling by people whose hands are forced now," said Christopher Johnson, head of Johnson Research Group in Cincinnati.

Ditto for stock mutual fund managers, as retail investors join the exodus.

Then throw in gun-to-the-head selling by investors who bought stock on margin and now are facing margin calls by their lenders -- demands to put up more cash to offset the tumbling value of their portfolios.

Everyone's looking for signs of capitulation -- a final deluge of selling by investors too disgusted and demoralized to hold on any longer. "Bottoms don't happen until everyone walks away," Johnson said.

The last two days certainly have had the feel of capitulation.