We're Now Putting In a Short-Term Bottom

I’m going to go out on a limb and say that this morning’s lows are going to form a short term bottom.  By short term I mean at least a week or two.

There are a lot of reasons to think this is the case.

First, we saw capitulation selling this morning along with a spike in the Volatility Index (VIX) to 37 - the same high it reached on August 16th.  This means people were scared and willing to pay up for puts.

Second, volume was extremely high today.  It was 2.6 billion on the NYSE and 3.1 billion on the Nasdaq.  Those are the kinds of levels we saw at the bottom in August and in mid-November for the Nasdaq when tech investors bailed on “lumpy” sales.

Many of the big, popular ETFs like the QQQQ, SPY, XLF, XHB and EEM had similary massive volume.

Third, intraday reversals of this kind have marked short term bottoms on Thursday August 16th and October 11th.

Fourth, stocks don’t just go straight down and we’ve now been down for pretty much three weeks straight (Wed 1/2 - Tue 1/22). 

Even when the Nasdaq was collapsing in March-April 2000 it managed to put in a solid two week rally from Monday April 17th through Monday May 1st after the three week collapse from Monday March 27 through Friday April 14th that took it down 33%.

Fifth, even if there is a recession it’s starting to be priced in.  The Nasdaq is 20% off its October 31st closing high and the S&P 16% off its October 9th closing high.  The S&P Financials are down more than 30% from their highs in May.  Even in a recession and a bear market stocks don’t go to zero!  At some point, even if business is bad, there’s value.  We’re starting to see that.

Sixth, even if this isn’t the absolute bottom, which I don’t think it is, the market is not a monolith and not everybody shares the view that we’re headed for a nasty recession.  Some investors are bound to start seeing value and step in to buy at some point soon.

Comments

[Robster:]

some logic in what you say but you can't take in isolation that a bounce will happen now because it happened with similar conditions a few months ago. Conditions are different now. Plus, as with any deal, a cheap stock doesn't mean its a good buy. It needs to make sense fundamentally too.

2008 Jan 23 11:14 AM

[David White:]

I wrote a similar article last Saturday, saying the support if it didn't bounce at 1325 was at 1250 on the S&P500. Then the foreign markets all crashed. There is always a lot of news. There is also the possiblity of huge automated selling, when people are already selling. Given that this may be the real marking of the start of a recession, the VIX might go higher than it did the last two times. That being said, I basically agree with you. The market shouldn't just go straight down. We are due for at least a temporary up movement.

2008 Jan 23 01:22 PM

[Long-Short Guy:]

"even if there is a recession it’s starting to be priced in. The Nasdaq is 20% off its October 31st closing high"

But who says we didn't overshoot on the upside?

2008 Jan 23 01:52 PM

[contraxism:]

VERY SHORT TERM IS MY BET
I give it less than a week before this rally fizzles out. This classic bear market rally will loose steam much quicker than the last, I peg about 12400 for the dow, then buyers will sober up quickly and realize we have more down side to come. There seems to be a shifting of funds from the late cycle stocks of tech and commodity winners to the early cycle stocks of financial and retail losers, also short sellers are covering these losers for better shorting opportunities. Why hold a short in financial's when you can short higher valuations in tech and commodities. Who is buying these high valuations today, is it program induced from the index?

2008 Jan 23 08:37 PM

[GKM:]

I also project a short bounce but I have it failing in about a week and a half. This is the part where the shorts get less short, as they feel that we have truly put in a near term bottom, and the bulls gain hope that maybe they'll make their money back.

I've been a bear from Q3 last year based on studying the charts. Today I got even more bearish since if we rally from here that likely means the bottom is even further from where the charts suggested it would be. Buyers beware.

People are starting to acknowledge recession is a highly likely proposition. I suppose it will take them just as long to acknowledge depression. You probably don't believe this right now.

I'll leave you with this thought: when money can be had for essentially nothing, what are unproductive assets worth? What are unproductive assets worth when you are being given the money to buy those assets with? Now put that in real (not nominal) terms? Hint: Unless that asset is something that can generate actual cash and keep the cash flow consistent with the real value of cash, it is not worth a whole lot. Adding liquidity to the liquidity fire sale is not the answer.

2008 Jan 24 01:11 AM

[late for di...:]

Capitalism is about exploiting workers and sucking money out of everyone else. So now we have capitalist corporations all over the world exploiting workers. However with the outsourcing of American jobs they forgot to leave enough jobs in the good old US to have enough people to suck money out of. They can bundle debt all they want but if people can't pay it back look what happens. The Economist magazine warned about all this years ago. Too bad no one listened. Especially our Administration and the idiots in the press who lionized Greenspan.

2008 Jan 25 02:18 PM