Stocks Had Bad November -- Will Santa Bring a Rally?

November, traditionally a good month for stocks, was anything but.

After a surprisingly positive October, the market went into free-fall, ending the month of November with huge losses. The three major averages fell more than 10% from their highs, officially putting the market in a correction.

AP

For the record, the Dow Jones Industrial Average and S&P 500 fell 4% and 4.4%, respectively, their worst month in five years. The tech-heavy Nasdaq plunged 6.9%, its worst month in over three years.

What happened? Not much, except that the housing market continued to implode, a credit crisis triggered billions of dollars of losses at financial giants like Citigroup and Merrill Lynch, oil soared to nearly $100 a barrel and more economists predicted a recession.

"Really Bad Psychology"

"There were a number of factors, all leading to just really bad psychology in the markets as a whole," says Charles Massimo, president and founder of CJM Fiscal Management, an investment advisory firm. "The markets more than anything else just don’t like uncertainy. And there’s been so much uncertainty wrapped around this credit issue because we didn’t know when the next shoe was going to drop."

The month certainly didn't begin on a auspicious note. After the Federal Reserve cut interest rates on Halloween but signaled that further reductions were unlikely, stocks plunged on the first day of November. The Dow skidded 362 points, or 2.6%, with the Nasdaq and S&P not far behind.

Things didn't get much better after that. A chart of the major averages over the past month looks like a staircase heading steadily lower, with a bump up at the very end. There were plenty of volatile days, when stocks swinging from huge gains to huge losses--sometime within a half hour.

Some of that turbulence was clearly the result of the upheaval in the credit markets. Nearly every day, a major financial institution disclosed more big losses from exposure to the subprime mortgage market. And as the housing market and economy appeared to worsen, worries about a recession grew steadily.

Fed Reverses Course

By the end of the month, the Fed--led by Chairman Ben Bernanke--was forced to reverse course and signal that it was open to more rate cuts after all.

"Bernanke kind of backed himself into a corner," says Massimo. "Everybody was saying the rate cut had to occur and pretty much if it didn’t, that was going to drive the market down."

What happens now? Some think that with rate cuts likely, oil falling back below $90 and Treasury efforts to help troubled homeowners, December might be a good month for stocks.

“I think what’s happening now is you have so many people who are either short or on the sidelines," Massimo says. "And if you do have a sustainable rally, not many people are going to want to stay on the sidelines or stay short on something that is going to last much longer than a Christmas rally.”

© 2009 CNBC.com