7 Reasons March Was Not the Bottom

"A ship is safe in harbor, but that's not what ships are for." ~ William Shedd

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%.

Comments

[karchad:]

The idea that we can't hit a bottom unless NOBODY IN THE WHOLE WORLD is predicting a bottom, is ridiculous. There were plenty of guessers who picked the 2002 bottom. It's the fact that the public at large gives up, is what gives us the bottom. And judging from SeekingAlpha articles and comments, and the rate of redemptions of equity mutual funds, I do believe we have seen the bottom. You've heard it here.

2008 Apr 11 08:41 AM

[NO DooDahs:]

Reason #1: Because JANUARY was the bottom, and March was just a lower-volume retest.

2008 Apr 11 05:49 PM

[Wisdom-Seeker:]

For DooDah, a clue brick: learn to read a bar or candle chart, and then look at any chart other than the Dow. Don't forget to try China and Europe. Unless and until we start to see higher highs and higher lows on the real indexes, the smart money bet is that March was just a minor rally and bull trap.

2008 Apr 11 07:30 PM

[Jack Yetiv:]

Maybe all of you are right. Maybe we'll hang around 12,000 (or whatever index you like) in a trading range for a fair bit of time.

There are persuasive arguments that financials and housing still have hundreds of billions of dollars of "air" to be let out of them, and probably, the retails aren't gonna do so hot in 2008.

On the other hand, nobody believes the rest of ther world is in danger of a negative GDP, and indeed, a fair number of countries will continue to grow robustly in 2008 and beyond. Since many US companies get a fair %age of their profits abroad, maybe this will compensate for the financials (witness GE earnings) and we'll "muddle-through" for the next year.

Just a thought. No crystall ball.

Jack

2008 Apr 12 10:38 AM

[Gary Meade:]

Sound theory's, I wonder what percentage of People believe them?

2008 Apr 12 11:05 AM

[300mph:]

"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."

Keep in mind here that Feb 04 confirmation was a year late to the party.

2008 Apr 12 11:53 AM

[leh:]

Excellent piece--I tend to agree and think that the inbred bullish bias we see paraded every day on CNBC needs to be taken with multiple grains of salt. Read this week's Barrons and see what some of the top-performing hedge fund managers over the past three years are thinking--they are almost uniformly bearish on the US stock market over the next year or two. And these are guys who saw the credit crisis coming and bet accordingly, with one fellow's fund up over 200% last year!

If you listen to the smartest traders/investors today, virtually none that I follow and respect (Gene Inger, Jeff Clark, Soros, Jim Rogers) thinks this recent rally is anything more than a bull trap in a longer US bear market. My long bets remain on "stuff," i.e. oil, gas, metals, coal, grains and the like as the long term commodity bull appears far from over--and has tremendous fundamentals behind it.

As for US equities, I see a grinding, punishing move much lower over the next year or two, or at least until the nearsighted, head-in-the-sand "pros"--and there are far too many of them to count, but Bill Miller and Laszlo Birinyi are the first to come to mind--stop saying the stock market has already discounted the recession. Talk about wishful thinking/denial! These are the same fools loading up on the financials and homebuilder stocks. Other than as a knee-jerk flip trade, these sectors should be avoided like the plague, or shorted until we see several more go into Chapter 11.

I continue to see investment advisors I previously respected going deeper and deeper into the Koolaid, and have to marvel at their lack of a sense of real time and historical perspective. This crowd seems to want to treat the recession as a very minor nuisance, a bothersome gnat on the ass of their bull if you will, that they can simply brush aside with sheer collective optimism, so that they can get back to the business of going long. I think not, and the market appears to be confirming the darker scenario.

2008 Apr 12 12:07 PM

[Chris Marshall:]

I tend to ignore "theories" and just go for macro-economic commonsense. The economy is slowing, probably to a recession, therefore EPS will undoubtedly slow. As EPS goes down, valuations will follow.

Until consumer confidence rises, credit frees up, and corporate earnings start to rise, we haven't come up from the bottom.

I expect major problems in finance for the next 6 quarters, what with Commercial real estate to follow Residential downwards, Bonds to be downgraded and at least one institution to fail, you could be looking at a floor around 10,000 to 10,500. At this level you will be approaching the p/e of other exchanges.

2008 Apr 12 01:13 PM

[Blair:]

What gets me on all of those talking 'value' heads is the lack of what I call foresight.

When they say, "I'm buying for a long term hold," none of the interviewers asks the relevant questions:

1. So you don't care who will be the next president? And he will not have an affect on the market?

2. What about the congress: their approval rating is even lower than Bush's. Could McClain be a winner and have enough coat tails to change the party in control?

3. Okay, you are going to buy Citigroup. The stock is down 50% from its recent prices. So, you are not going to buy at the top. However, if the stock drops another 25% from its recent top prices, you will be down 50% from your buying point. Do you continue to hold the stock, or what? When do you call it quits? ($50 -> $25 (50%), $50 -> $12.50 (75%), but! $25 -> $12.5 = 50% drop.)

2008 Apr 12 03:14 PM

[cynic69:]

It seems like the market needs a reason to rally. With so many things going wrong I don't see any reason for it to rally other than the fact that Ben keeps pouring M3 into the mix. Ben and Paul can't control the price of oil or the price of real estate and it looks like the price oil is going to keep going up and the price of real estate is going to keep going down. There has been very little volume involved in this latest "rally". That says to me that the institutions are not really serious and that most of the buyers are the starry eyed folks that listen to Jim Creamer on CNBC. I for one am going to keep my diddy bag full of puts.

2008 Apr 12 06:26 PM

[climbera5:]

Good article and comments all. I agree Blair, the value heads are like starry eyed freshmen, oblivious to the ripple effects of deteriorating fundamentals and wishful thinking that real estate prices have stabilized. Living here in central CA, I can assure you the problem is growing and we have yet to see a floor on prices. The pundits in NY are insulated from from the carnage here and seemed surprised when banks, etc. continue to report even worse numbers. GE was a prime wake-up call that the worst is not yet over and more 'surprises' will follow. Thanks chrism1962 for reminding us that common sense is indeed fleeting and that commercial loans will be the next sad story.

2008 Apr 12 08:28 PM

[authentic:]

The influx of liquidity has halted the panic but individual stocks as well as the market as a whole is primarily influenced by earnings. We will see how this plays out over the upcoming quarters.

2008 Apr 12 10:10 PM

[User 155157:]

The DOW TRANSPORTATION INDEX remains strong. As long as we do't see the DJI below 4000 there is no real danger for a steep fall.

2008 Apr 13 01:55 AM

[leh:]

Good comments here all. I would only add an observation that Wall Street appears as insulated and in denial as Washington and the power elite there. Let's face it, Bush has wreaked utter havoc with our economy with his disastrous foray into Iraq, and we will be paying for it for several generations.

I don't mean to drag politics into the brew here but it's impossible NOT to IMO given our burgeoning deficits. Money that should have gone into infrastructure rebuilding (see New Orleans and the airlines and interstate bridges) and health care is instead to be waylaid into debt service for many many years.

My main point is that the denial in Washington is being mirrored on Wall Street, but there's a heavy sinking feeling underneath it all that leads me to believe we are seeing the death throes of a once great nation, and it makes me want to weep.

2008 Apr 13 02:00 AM

[elwind45:]

It is funny how there is dollars piling up all over the globe. Yet fear keeps them from being reinvested back home. A logjam with several years to play out is gripping debt markets. The stock market has created enemies of its present and future investors. Dried blood in the streets! The market is cheap(5 years from now) yields and p.e. are reasonable and the fed is in panic mode. Which has more risk: A solid yielding company or a good located property. Neither 5 years out! Look to fight inflation its your best bet. own puts or some bear market funds at all times! I think oil takes a ole fashion wompin this week. and gold too. (am gold bull)

2008 Apr 13 07:15 AM

[nukldrager:]

2007 gdp was $13.8 trillion nominal. Consumer spending at 2/3 gdp would be $9 trillion. Consumer gets the one two punch at the pumps. As you fill your tank at $3.25 per gallon, notice that diesel is a dollar more per gallon, and you will be paying that as well when you shop for anything. Guessing that at least %50 of consumers will not be able to duck and dodge these punches or hit back due to job loss and income loss due to inflation, what happens if gdp shrinks to $8.5 trillion over the next 3 to 5 years?

2008 Apr 13 08:14 AM

[2old2care:]

Thanks everyone. Great Post and Comments.
A good Sunday morning read indeed..

2008 Apr 13 01:37 PM

[engineer1:]

I think we are in a little trading range here and I am shorting the tops of the rallies with Bear market ETF funds and selling them on the dips. I think we will see plenty more rubber band rallies with bullish investors becoming increasingly frustrated with thier inability to get on board before the upspike. This is a very bearish condition and DJIA 12,600 looks a lot like serious resistance to me. It is surprising to me how many companies with " overseas profits" are into the financial market as well like GE. Another result of US economic conditions (foreclosures, job loss, etc.) is the sheer amount of used items on Craigs list and the like that are currently for sale at bargain basement prices. With Chinese manufacturing costs going up and shipping costs on the rise as well even those who are in the market to buy can probably find good deals on used local merchandise left over from our nationwide shopping spree much cheaper than China can manufacture it. Also unlike the last decade new items are not so next level better than used. So how can anybody truly say that the slowdown is contained to the United States. If the markets truly predict the economic future than could the Hang Seng being quite down against the backdrop of good earnings and good economic times be an indication that the rest of the globe could be affected by our problems? If so I think that could really impact the earnings of company's that count on a continuation of global expansion to prop up their bottom lines. Anyway the market does not have to make sense, but until proven wrong I intend to be short after every sharp rally and limit my long positions to only the strongest performing sectors. JJ

2008 Apr 13 05:38 PM

[oldgoldbug:]

Good post engineer1 - maybe ebay will pick up some of the items to be liquidated.

2008 Apr 13 06:46 PM

[johnthebear:]

I hate to pour out the kool aid, but I see a Dow of 8,000 in the works! Does anyone agree with me?

I come to that conclusion by analysis of the NASDAQ bubble in 2000. I used the chart in Scottrade to compare with several indexes that reveal the new bubbles that far exceed the NASDAQ of 2000. IYR, the Dow Jones Real estate index is higher than the high of the NASDAQ. The FXI (China) index is reached TWICE the level of the NASDAQ and EEM (emerging markets) reached an even higher high before all the indexes topped out in 2007.

Now, if you followed me on that exercise what next?

Well, follow the descending line of the NASDAQ as it bumped along many so called bottoms until late 2002. The extremes of the IYR will likely follow as similar path, IMO. The fact that the China and emerging markets are all sharply off their highs should give one pause. The fact that stock exchange all over the world, except for Mexico and South America are all trading below their 200 day moving average should really make one ditch the kool aid! When you take the chart and start drawing lines, of the likely outcome it is not hard to imagine a Dow 8000.

I was just reading in National Real Estate Investor that Capitalization Rates on New York real estate on property bought in 2006-2007 was only 3%-4%. (UK cap rates in this same time period were reported to be 4.56%) In my judgment, a cap rate of 6% would be the lowest reasonable rate justifiable for an all cash purchase. (If the cap rate doubles from 3% to 6%, assuming NOI remains constant means that the property value will be slashed by 50%.) In time, over the next 2 years, hedge funds needing cash and lenders trying to sell buildings taken in foreclosure, etc., and I would think the higher interest rates (junk bond rates)? and lending standards will force a potential buyers to sharply lower their offers.

There are many now projecting revaluation of overvalued prime real estate over the next 6 quarters, Chris Marshall et al.. I think that we will all be shocked at how long it will take to recover from the housing and commercial property bust. I read that the AIA has reported the architects have almost no new business, which is a 9 month leading indicator for commercial construction to begin. With no new construction in the pipe line, how can there be a recovery of jobs or consumer spending? With the lack of bank financing at attractive interest rates this is certainly reasonable.

You know, another factor no one seems to appreciate in the home lending business is that there are a huge number of mortgage companies have gone out of business and employment is down sharply. It will take a long time to rebuild the lending process so that each loan approval will be efficient. Just think, they may even require honest appraisals for both residential and commercial property again! The lenders have been forcing appraisers to make appraised values high or they get no appraisal work. I am sure that will change once the regulators get back to work! So, from the real estate side of the market, this will be a long painful process, perhaps many years to recover to the 2007 highs in real estate.

As for the "real economy" some like to talk about, I am not sure there is a difference. After, the real economy is really based on fairly valued real estate and is built on the consumer. With the enormous loss of wealth in markets all over the world there just is no credible wealth source to rebuild with except the sovereign wealth funds and I would not count on that to redeem us. Let's face it C, BAC, CFC, WM etc. have all shot their wad and now, so has the FED, they are now looking like OLE "One Bullet Barn" as Andy used to say.

2008 Apr 13 07:14 PM