A Word of Caution on Double Bottoms

With the amount of rejoicing that’s been creeping into the financial newscasters' voices recently, you would think that we were somewhere in the middle of the dot-com boom.

Unfortunately, we’re not.

Now it’s only natural that the media is giddy – they’ve had months and months of negativity followed by more bad news. It’s like the first day of spring at college – you find people taking off more clothing, and celebrating more than necessary in what is – for a summer day – a very chilly day. But hope springs eternal.

Investment U has been trying to tell investors that it’s not as bad as everyone thinks for quite some time now. In fact, we’ve been prodding those on the sidelines to think about getting back into the pool. The water’s fine.

But we also want to add a word of caution to everyone’s expectations. It’s still quite chilly out; beware of a “double bottom” where the market re-tests its lows.

After being shocked into submission (and onto sidelines), millions of Americans are just starting to feel comfortable about getting back into the market. They might be in for another shock if the market takes another leg down.

A double bottom, or bear market rally, is just that, a short-term rally in an otherwise negative market. And while we see markets improving by the end of the year, what we don’t know is if we’re getting “head-faked” by our current rally.

Three weeks ago when stocks were on the bottom they looked appetizing. Right now they look expensive for being “bargains.” It doesn’t mean that there aren’t incredible values out there, but it does mean that you need to be a bit more careful about which ones you pick.

Comments

[Steven Vincent:]

This is a traders market and will be for many years to come. If you are not willing to set stops and sell and buy trendline breaks then you shouldn't be in this market at all. Stay on the sidelines and wait 4-6 years until a clearly defined bull trend emerges.

It's useless to fret over whether this is a bear market rally or the "real thing". Who cares?

Apr 12 05:42 AM

[investor88:]

Agree this is a traders market, will be for many years to come. Always set stops when trading.

Apr 12 07:31 AM

[Robert Bunting:]

I think that there are those that are hopeing, that this is a bear market rally, what else could they hope for, but i will add that there were stocks that were oversold, that if you did not buy them , you will not see them at at those levels again , the market may move up and down like stocks, but the prices of some stocks will not go back down , and there are stocks that will keep moving up , wheather the market goes down , there are still good buys out there, and it will still seem like a bull market ,if you buy some of the beaten down stocks

Apr 12 10:30 AM

[ArkansasAngie:]

What percentage of volume are speculators and program trades? According to Tyler D program trades are in the 35% plus range. My bet is that speculators are in the same range.

That is not a place I want to be.

Apr 12 11:51 AM

[almansor:]

On a much grander scale of decades, we are actually coming down from a double top: the first top was in about March 2000, the second top was in about June, 2008. That is the problem with most market touts: they never specify a time scale. When they recommend something, they never specify a price, a time scale, or a suggested value for a stop loss. (They are never, ever, wrong, so you don't need a stop loss, right?)

The Titanic is sinking, but the passengers are too busy gambling in the casino to notice.

Apr 12 01:34 PM

[Old Trader:]

I'm eagerly awaiting to see what the upcoming week brings. The holiday shortened week with attendant light volume precluded the market giving any really clear "signals", imho.

Apr 12 02:17 PM

[mac.barron:]

The market goes up a little bit and the Mainstream Media starts to freak out. Looking back at the S&P 500 I see:

27 Oct 08 - 848 to 4 Nov 08 - 1005 up 18.5 %

20 Nov 08 - 752 to 6 Jan 09 - 935 up 24.3 %

09 Mar 09 - 676 to 10 April 09 - 856 up 26.6 %

I'd love to be wrong but all I see is another Bear Market Rally. As for the Media; like Bear Bryant said: When you get to the end zone at least act like you've been there before.

Apr 12 02:48 PM

[Gtarras:]

markets are moved by institutional investors


On Apr 12 11:51 AM ArkansasAngie wrote:

> What percentage of volume are speculators and program trades? According
> to Tyler D program trades are in the 35% plus range. My bet is that
> speculators are in the same range.
>
> That is not a place I want to be.

Apr 12 03:20 PM

[Gtarras:]

a lot of folks hoping for a drop NOW so they could buy at the bottom... but when the bottom comes, they still chicken out...


On Apr 12 10:30 AM Robert Bunting wrote:

> I think that there are those that are hopeing, that this is a bear
> market rally, what else could they hope for, but i will add that
> there were stocks that were oversold, that if you did not buy them
> , you will not see them at at those levels again , the market may
> move up and down like stocks, but the prices of some stocks will
> not go back down , and there are stocks that will keep moving up
> , wheather the market goes down , there are still good buys out there,
> and it will still seem like a bull market ,if you buy some of the
> beaten down stocks

Apr 12 03:24 PM

[Mayascribe:]

To those who continually say this is a trader's market. My thoughts agree with you, but my trading account says you're categorically wrong.

How many of us active traders are kicking unmovable objects that we had shares of Wells Fargo @ under $8.00 (now $19.97)? GE under $7.00 (now $11.41). Yamana Gold under $5.00 (now $8.12). Exide under $2.00 (now $4.84)? A Power Systems (APWR) under $3.50 (now $5.90)? Yingli Green Energy under $4.00 (now $7.27)?

Unfortunately, I listened too much to the TV "experts" as well as experts here at SA and reduced my positions in all of the above stocks, and a few more. Am I irked? You betcha!

Most of the people on these shows like "Fast Money" are active traders and covet a volatile market, to their gain. Yet, all of those traders will say most definitely that all of the above stocks will be trading even higher than they are now in one year. Likely, much higher.

It's all about pain tolerance, and patience. "Buy and Hold" is most definitely not dead. Even if this is a dead cat bounce (which I believe it is), even if the market goes way down (which I believe will happen again), the November, December and March lows of the above stocks, and so many more, will not be seen again.

Other than a day trade, I wouldn't be buying right now. But, most certainly, I'm not selling any more shares of stocks I bought when the market was at its recent bottoms. I learned my lesson...the hard way.

Apr 12 04:17 PM

[nmelendez:]

They will sell back down. It's all a matter of timing. Remember, the longer the rally goes the bigger their profit upon selling. At the same time, pension plans get ripped off. I am not a cospiracy theorist but i really do not see how this market trades so violently unles HUGE movers were involved. Us small fries could not put a dent on the S&P. Personally, i am buying spec stocks and others like PFE with good dividends. Stock goes down, i get good dividend, If it goes up i get the gains. :)

On Apr 12 04:17 PM Mayascribe wrote:

> To those who continually say this is a trader's market. My thoughts
> agree with you, but my trading account says you're categorically
> wrong.
>
> How many of us active traders are kicking unmovable objects that
> we had shares of Wells Fargo @ under $8.00 (now $19.97)? GE under
> $7.00 (now $11.41). Yamana Gold under $5.00 (now $8.12). Exide under
> $2.00 (now $4.84)? A Power Systems (seekingalpha.com/symbo...)
> under $3.50 (now $5.90)? Yingli Green Energy under $4.00 (now $7.27)?
>
>
> Unfortunately, I listened too much to the TV "experts" as well as
> experts here at SA and reduced my positions in all of the above stocks,
> and a few more. Am I irked? You betcha!
>
> Most of the people on these shows like "Fast Money" are active traders
> and covet a volatile market, to their gain. Yet, all of those traders
> will say most definitely that all of the above stocks will be trading
> even higher than they are now in one year. Likely, much higher.<br/>
>
> It's all about pain tolerance, and patience. "Buy and Hold" is most
> definitely not dead. Even if this is a dead cat bounce (which I believe
> it is), even if the market goes way down (which I believe will happen
> again), the November, December and March lows of the above stocks,
> and so many more, will not be seen again.
>
> Other than a day trade, I wouldn't be buying right now. But, most
> certainly, I'm not selling any more shares of stocks I bought when
> the market was at its recent bottoms. I learned my lesson...the hard
> way.

Apr 12 05:35 PM

[William Cowie:]

There is a new factor driving the rally that we need to consider: PPIP. Whereas TARP money had to be repaid, PPIP generates profits, earnings, for banks in ways God never intended. The detailed explanation is long and shown here:
seekingalpha.com/insta...

The bottom line is banks are showing much higher earnings between PPIP and the "no need to mark the bad loans down to their true worth any more." Some banks are Dow components. A bank earnings spurt leads to higher stock prices of Dow component stocks. We all know what happens next: trading programs see a Dow rise, and kick in buy orders. Boom! Like John Madden would say, you shot the bear.

When the market fell the early part of the year, lots of people blamed Obama and their team. Now they've discovered the formula to get prices rising. It's not their money, so this is costing them nothing. Does anybody think they're going to lift their foot from the pedal?

Never before has a government had such a direct link to the Dow. I personally think it's quite scary, but what do we do? I don't think buying Tea Party T-shirts will make any difference, and that seems to be the best the American population has come up with to date...

Apr 12 06:45 PM

[cebu sun:]

Watch it people. There were 4 or 5, +25% bear market rallies in the Great Depression. They are designed to develop this euphoria, suck you in, then dash your portfolio. Watch it. We are far from finished.

Apr 12 10:03 PM

[sr9web:]

Sell some out of the money covered-calls and buy them back after the next pullback


On Apr 12 04:17 PM Mayascribe wrote:

> To those who continually say this is a trader's market. My thoughts
> agree with you, but my trading account says you're categorically
> wrong.
>
> How many of us active traders are kicking unmovable objects that
> we had shares of Wells Fargo @ under $8.00 (now $19.97)? GE under
> $7.00 (now $11.41). Yamana Gold under $5.00 (now $8.12). Exide under
> $2.00 (now $4.84)? A Power Systems (seekingalpha.com/symbo...)
> under $3.50 (now $5.90)? Yingli Green Energy under $4.00 (now $7.27)?
>
>
> Unfortunately, I listened too much to the TV "experts" as well as
> experts here at SA and reduced my positions in all of the above stocks,
> and a few more. Am I irked? You betcha!
>
> Most of the people on these shows like "Fast Money" are active traders
> and covet a volatile market, to their gain. Yet, all of those traders
> will say most definitely that all of the above stocks will be trading
> even higher than they are now in one year. Likely, much higher.<br/>
>
> It's all about pain tolerance, and patience. "Buy and Hold" is most
> definitely not dead. Even if this is a dead cat bounce (which I believe
> it is), even if the market goes way down (which I believe will happen
> again), the November, December and March lows of the above stocks,
> and so many more, will not be seen again.
>
> Other than a day trade, I wouldn't be buying right now. But, most
> certainly, I'm not selling any more shares of stocks I bought when
> the market was at its recent bottoms. I learned my lesson...the hard
> way.

Apr 13 03:38 AM