To Reach Bottom, We Need More Good News

Three months ago, I published an article suggesting that the market would not turn around until investors got lots of good news.

I elevated “good news” to the top tier of turnaround indicators, because most of the items others were looking at in their efforts to “call the bottom” just made no sense. Examples:

• Record-setting VIX levels
• MACD indicators
• AAII’s weekly investor sentiment surveys
• P/E ratios
• the length of the bear market
• the depth of the bear market
• the breadth of the bear market
• ancient support levels

This bear market is largely driven by fear and uncertainty, not to mention the recession and other hard economic realities. I suggested that to keep calling out “the next support level” when the last one gets crushed seems foolish when the next level down occurred five or six years ago.

When a market is ruled by fear, its movements are even more subject to emotional reactions to the news of the day than they usually are. So here is my list of news items from that original article. I’ve scored them simply as: -1 = news still bad; 0 = news neutral or ambiguous; and +1 = news is good. As you will see, the news has remained overwhelmingly bad. As long as this continues, the bear market will be with us. When (if) we get a spate of good news, the market will probably start turning around.

click to enlarge

The “score” from the chart above is -12 (versus a possible +26). When I wrote the original article, the S&P 500 was at 852. It opened this week at 770 (down 10% from the date of the original article). To me, that is no surprise. There isn’t enough good news yet.

Comments

[market ace:]

So I guess you want Bernanke and Co to tell more lies and pretend their economic disaster is not really happening?

Feb 23 11:35 AM

[ecliptix543:]

I would take issue with grading the extension of Bush tax cuts as a positive.

Feb 23 11:43 AM

[Bill Thompson:]

the recent turmoil has been delayed the past several months. Deflationary signals are becoming more and more severe, see here crashmarketstocks.com

Feb 23 01:53 PM

[mr freddo:]

Thanks for providing an interesting perspective. You are certainly correct that all of the news today is negative. We are being hit by tidal wave after tidal wave. Sub-prime, alt-a, arm, credit cards, commercial loans, derivative unknowns, bank failures, nationalization, world trade declines, civil unrest, state deficits, unemployment, deleveragiing, deflation, inflation, not to mention all the havoc that will be caused shortly from rising sea levels, aging population, and massive, massive amounts of government debt.

Excuse me while I go sell some more stock and buy some gold mines.

Feb 23 01:55 PM

[The Good Ne...:]

David,

I totally agree and am reporting all the good news that I can...
I really enjoyed the spreadsheet... would you agree that perhaps not all elements (rows) on your sheet should be equally weighted?

I'd suggest that there also may be a few additional rows to add to your matrix. Some additional lead indicators like your "initial claims" row.

I question your rating on foreclosures tho, the data is clear that they have slowed appreciably. Additionally, the data I just posted yesterday on credit markets indicates they are quite thawed both on the commercial and consumer sides...

mast-economy.blogspot....

Those are at least two rows that I'd give a (+1) based on current data. (Perhaps there is not yet enough mainstream media spotlighting that data?)

GNE
goodnewseconomist.com

Feb 23 02:10 PM

[aarc:]

I'll call the bottom when there is an over-abundance of extremely bad news.

Final bottom will finally come when spiralling company bankcrupcies become the daily diet with the public crying out loud for a ceasation of 700,000 or 800,000 job loses a month.

Final bottom will finally come when the threat of civil unrests looms large enough for everybody to take notice of the dire economic condition the country have let itselt in.

Final bottom will finally come when 3, 4 or 5 countries in Eastern Europe finally succumbed to bankcrupcy.

Final bottom will finally come when China issues an ultimatum to the United States that they will no longer support any effort by the US to artificially prop up it's own economy and that China is going to have it's own robust economy with or without the Western World.

Final bottom will finally come when the very survivability of the government itselt becomes questionable.

Finally bottom will finally come when the government and the general population stop playing chess with the global investors and start begging them for their hoarded capital to be infused into a dying global economy and thus generate much needed jobs.

Final bottom will finally come when something extra-ordinary happens such as the equivalent of of 9/11 or worse - or something 2x to 5x more destructive than Katrina finally wakes up a comatose country from in-action to necessary galvanized action.

Feb 23 02:15 PM

[Consider_this:]

You wrote:

I elevated “good news” to the top tier of turnaround indicators, because most of the items others were looking at in their efforts to “call the bottom” just made no sense. Examples:

* Record-setting VIX levels
* MACD indicators
* AAII’s weekly investor sentiment surveys
* P/E ratios
* the length of the bear market
* the depth of the bear market
* the breadth of the bear market
* ancient support levels

How is any of those a bad indicator???? Weren't these also used on the way down, by optimists to constantly defend that "we've reached the bottom"? Now that these are breached, suddenly it's no good for bears to use them anymore?

You always needs to look at a crash with leading indicators; but you need to look at a recovery with lagging indicators TO CONFIRM THE RECOVERY IS REAL.

Japan had multiple false leading indicators that they've recovered from deflation. It's almost a once per year or once per two year event; and yet they're solidly in their 24th year of economic decline.

Unless you're a volatile loving speculator, I don't see why you need to whiff at the first "possible" scent of recovery. There'll be many false recoveries and false bottoms before the final climb up.

Feb 23 02:24 PM

[Jolly_Rancher:]

I'll buy when our cities have been leveled by rioting followed by mass starvation and disease and finally by a mass exodus to Costa Rica by the wealthy. Only then will prices and debt levels return to an acceptable level.

Feb 23 02:27 PM

[Nick Waddell:]

In a normal bear market assets are diminished, reallocated and a mini bull market begins in a certain sector. Remember when tech crashed, interest rates were slashed and a housing bubble was born? Looking back that was really just the normal movement of money.

A lot of people are looking to find where the money is going to flow to now. Of course there is a distinct possibility that we have seen a wealth destruction that means no there are no assets to be reallocated.

Still I can help but think we are missing the germ of a bull market is some sector, somewhere, and it will appear obvious to us after this is all over.

Feb 23 02:28 PM

[aarc:]

With good news indicator; more likely than not you will be buying when Dow Jones finally reaches 11,000 to 12,000 after massively bouncing of the high probability bottom of 6,000 to 5,000 levels.

By the time Dow Jones reaches 6,000, everybody, except the very few, will be more than afraid to buy anything and will keep on waiting for the good news.

Might as well just buy now at 7,000 to 6,800 levels.

Feb 23 02:56 PM

[Speedspirit:]

How about not giving in to the ideas of the insane. Forget nationalization of the banks, its not going to work. Why would the American people want our government to have ownership in the cause of this disaster. GOOD NEWS would be that the Government has decided that the Bush policies are terminated and the new policies will support activities to promote restoration and growth of productive employment and social services. Painful as it may be it is time to move on. The Federal Reserve needs to go.

Feb 23 03:04 PM

[HiSpeed:]

Just perhaps *REALITY* is feeding the bear!

Feb 23 03:05 PM

[Anthony B:]

"A slowdown in the number of new claims for jobless benefits" - there is no way a market bottom can stick with this number still coming in between 500 - 600,000 per month. I am looking to get back in, when that number gets to 300,000 and even that will probably be too early.

Feb 23 03:29 PM

[David Van K...:]

Thanks everyone for all your perspectives. Some reactions to your comments:

1. I did not mean this to be a list of things that are good or bad for the country or the economy, short-term or long-term. I meant the list to suggest what sort of conditions and news items will create an environment to lure investors to start to get back into the market.

2. So, market ace, I am not hoping for Bernanke to do anything of the sort you suggest.

3. I listed extension of the Bush tax cuts as a positive, because I think their expiration will be taken by most investors as a negative. It's debatable.

4. Good News Economist, I agree that not all the items should be weighted equally. But I opted for a simple approach. The main point is, if there's lots more bad news than good, the market is not going to start back up. Investors are too shell-shocked, and understandably so.

5. Of course, more items could be listed. Consider mine a "starter list." Jolly Rancher's and aarc's comments suggests a few different ones. Everyone can form their own opinion of their efficacy.

6. To : Consider_this: You made my point for me. The items I listed have certainly been used by people trying to predict the bottom. They have all failed, and that is my point. The VIX reached record levels...and the market continued downward. P/E ratios are at rock bottom...and the market continues downward. The length and depth of the bear market are now well past "average"...and the market continues downward. Support levels reaching back to 2002 are being mentioned...and the market continues downward. Really, how can any level last seen in 2002 qualify as "support"? It does not make sense.

7. To aarc: I disagree with your second comment. Historically, bear markets end about in the middle of a recession, months before the recession is over. Most of the items I suggested as positive news are connected to the recession, not to the market directly. I expect to be back into the market long before it gets back to 11k to 12k. The news will have turned long before that.

Feb 23 05:14 PM