Was That 'a' Bottom or 'the' Bottom?

In creative parlance, markets generally hit bottom when fear reaches a maximum. Perhaps a combination of frustration, disgust and anguish come along for the ride, as traders and investors give up the hope for rallies. These are short but sweet moments in time, not the long, drawn out failures. As traders, it's critical to analyze situations, process the information and make a decision. Capitulatory events are cleansing, brief, and hardly noticed. However, we noticed this one on Tuesday July 15, and it may prove to be the catalyst going forward. In addition, the new lows on Tuesday reached an extreme level not seen in 20 years.

Financials Turn It Around

The market teaches lessons, you learn them and then it shifts gears on you. The masses are always most disappointed because hey, if everyone could figure it out, we'd all be wealthy. There's no mistaking that financial stocks have performed miserably. There are all sorts of reasons for this, but suffice it to say the beating in this sector has not been unjust. But something occurred on Tuesday, and it was very noticeable. Early morning there was a release of stock by the bulls... we saw prices reach depths that were off the charts. It smelled of panic, too. Perhaps investors were so disgusted with this group they threw up their hands and said 'that's enough'. What that ensured was a monster rally the next day. Now, I won't call a bottom after a two day respite... heck, I won't even go there unless some time passes along. I may be late to call it but safer. But there was something else, too, that contributed to this rally. The Feds are cracking down on short sellers, which is completely absurd but that talk may have spurred some furious buying as well. Whatever the case, financials rallied to their biggest gains in years the following day (Wednesday).

It's Still A Bear Market

This bear market is not unlike others, if perhaps longer in duration. The swipes have been vicious and brutal for the bulls. Rallies have been short, sweet and sold in a moment's notice. Bear markets build the hope of higher prices, a comeback market... then shoot down those hopes with another leg down. We note this as a word of caution, that while the markets have rallied smartly here, the fear is justified. Volatility as measured by the VIX still has not shown a spike in fear, but the recent reading of 30 (during Tuesday morning's sell fest) may have been the nut.

However, we don't want to get in front of this just yet - more confirmation is needed, and more time. Besides, there are still sectors that have not been hit too hard. A true end of a bear market is when all groups have taken a hit. New lows on NYSE issues last Tuesday hit 1,304, a number not seen since 1988. That's more than 40% of stocks on the NYSE! Perhaps an intermediate bottom is in place, but whether it is the ultimate bottom or not... that's quite a ways off.

Disclosure: None

Comments

[secmaven]

If we have seen "the" bottom of this bear it will be the first bear in history without at least a dozen head fake rallies.

[goldenhinde]

Thanks for reminding me. I got in on WAMU and am up by 33% this week. Your comments are sobering - I thank you for reminding me not to think of myself as smart. Lucky would suffice.

[dougnhi]

Smart investors shouldn't be fooled. Like the mountain road sign says...."drivers don't be fooled...sharp curves ahead!". You'd have to be blind not to see that nothing goes straight down, and that a temporary rally would be needed to relieve panic. Housing and Banks are a mess. Their averaged losses are probably a good leading indicator for how big the eventual market losses will be. Housing at ~25% (so far), and banking at ~60% (so far) probably means something like ~40% in the market. This implies at least another leg down (and possibly 2 if conditions deterioriate further). We're only in the 3rd inning or so of a long, hard game. Buyers beware!

[sorgmot]

We are looking for a progression of lower lows and lower highs to the end of September 2008 at 1050 for the S&P500. Then an upswing to the end of March 2009 back to 1140 at S&P 500. Then a major down swing to a S&P500 low of 900 at the end of September 2009.

[John Egan]

There are so many types of bottoms... Double bottoms, V, triple bottoms, inverse head and shoulders, saucer, cup and handle... And each has its own style of panic attached. Trying to determine what and where is difficult .. Reporting after the fact is so much easier.

However, having said that, I feel like we're in Dante's Inferno at the 9th level and kinda wondering if there might be a sub-basement somewhere....

Thx jegan ;-)

[oldtrdr]

(chuckles @ jegan's "sub-basement&quo... THERE'S a cheery thought!!!

old trader