I was almost 100% in cash going into the July 2007 highs as I sensed the market was running out of momentum. Tired of getting whipsawed, I have gritted my teeth and progressively upped my long exposure since the August selling stampede rather than continuing to buy and get stopped out.
While I agree with those who say the March lows marked a major intermediate bottom, the humbling experience that is being an Investment Director in a public forum such as VesTopia calls for looking at the flip side of the coin. So without further ado, the 7 reasons March was not "the" bottom;
• Too many pundits have called the March lows "the" bottom. The proverbial "they" say that bottoms only happen after people stop looking for them.
• The lower low in January 2008 on the S&P marks the first in a series of two lower lows so far since a series of lower lows that began in April 2001 and was finally broken by a higher high in March 2004. If history repeats, unless sooner broken by a higher high this series of S&P lower lows has a ways to go still.
• The simple moving averages remain in a bearish configuration on most of the major stock indexes. To illustrate, on the Russell 2000, the Nasdaq and S&P the 20-day moving average is lower than the 50-day moving average which is lower still than the 200-day moving average.
• Related to the first bullet, the March lows were not accompanied by true capitulation. To illustrate, when the S&P made its closing low on March 10th the ratio of decliners to advancers was only 5.2 to 1 and the ratio of down volume to up volume was only 8.6 to 1. True capitulation would have been marked by at least a 9 to 1 ratio on both internal measures.
• The recovery from the March lows has quickly moved each index into stochastically over-bought territory while simultaneously failing to achieve higher price highs. Stochastic sell signals have recently been generated on each of the indexes signaling that the overbought conditions could potentially be worked off by lower prices.
• Related to the second bullet, Dow Theory remains on a sell signal. The last sell signal generated by Dow Theory was in March 2000 and it took until February 2004 to generate a Dow Theory buy signal. Again, what if history repeats itself?
• While we came pretty close, we never saw the number of bearish investment newsletter writers get to 50%.