When Will the Market Turn Around?

Now that the S&P 500 hit another new low Friday, investors are curious when things will finally turn around. Is every rally just a bear market rally? The market hit a major intra-day level low exactly two weeks ago, and we've been hovering above it ever since.

I’m no technical analyst but it does seem that the market likes to test its recent lows, and if no new low is made, prices rally. Fortunately, we didn’t break through the intra-day low from October 10. What impresses me is that most of the rally since October 10 was in pretty bad stocks, while the higher quality stocks, like our Buy List, haven’t been doing too well. That just tells me that this two-week interlude was merely a reaction against the reaction.

Friday also marked the 79th anniversary of Black Thursday, and it’s the 101st anniversary of J.P. Morgan (JPM) bailing out the economy during the Panic of 1907. The panic ended when J.P. said so -- I wish he were around today. Still, spotting a bottom is tough business, and the rally often begins when things look terrible.

A perfect example is what happened 18 years ago. Note the chart below. The black line is the S&P 500 (left scale) and the gold line is earnings (right scale). The two axes are scaled at a ratio of 16 to 1.

The market rallied while earnings continued to fall through 1990 and 1991. Due to the rising market, P/E ratios soared, but that would have been a false signal that stocks were overpriced. Earnings were still plenty lousy through 1992. It wasn’t until 1993 that earnings growth really got going. The yellow line finally caught up to the black line in 1994, but both kept on rising.

The point is that the market can turn around anytime now. I grew used to clients saying that they’re just “waiting for the smoke to clear.” It doesn’t work that way. The market has already crashed. It can certainly go down further, but most of the risk is gone.

Comments

[corley10:]

Most of the risk is gone? How can you possibly say that? Just because the market is down 40% does not mean it can't go down another 40%. I am not so presumptuous to say that I know the answer, but to say you do is riduculous. I heard the same thing in 2001-2202 with the tech meltdown. It's not over until it's over.

2008 Oct 26 11:37 AM

[scared:]

You are so write corley what happens if it continues to decline and test newer lows.

2008 Oct 26 02:19 PM

[mrresponsible:]

I wish your chart was comparing today's earning/S&P chart.

2008 Oct 26 03:40 PM

[ozcutty2:]

Great points of this article are that the market rallied something like 12 months before earnings bottomed out. Also the rally was 30-40% and happened very quickly, mostly in about a month. Market rallys after every big crash even after the 1929 crash, rallied in 1975, 1988,etc.
The question is after the 30-40% releif rally is over in 6-9months, what happens next?

2008 Oct 27 12:20 AM

[investor88:]

Eddy says the risk is gone, water is safe. Some readers are skeptical, there may be danger in the water although it looks calm after the shark attack. Think through and make your choice. I follow the dictum its not over till its over [corley10 comments above].

2008 Oct 27 02:00 AM

[ChickenLips:]

The bottom isn't here yet. How do I know this? Because the average American is freaking out about their 401k balance. The average American sees the economic slowdown with their own eyes and knows that unemployment is rising. These fears are causing these people to consider bailing out of the market for good. When this happens in masse, watch out!

Fundamentals are everything at this point.

2008 Oct 27 01:02 PM

[HoldingOn:]

Well today's decline coupled with yesterday's losses clearly proves that we just can't call this one. Lots of bad news across the board and the glum economic outlook aren't helping our poor markets. However, the only suggestion I have for you all at this point is: if you have already taken a substantial loss on your portfolio (and can wait to cash out), just wait for the bounce. At least you are still in it. If you sell now (worst thing to do) you will not have ANY chance to regain those losses. Be level-headed, unemotional and just remember- it will come back again eventually. If you are on the sidelines waiting to get in- don't try to time the bottom. It's close enough right now and if you buy into good companies, you will inevitably make great returns (over the next few months, years). Yes, it may waiver from day to day, and yes, you may appear to lose money, but think longer term. In a year from now it will not matter whether you bought into this market on October 10th or November 4th.

2008 Nov 06 01:33 PM