Reaching for the Bottom in the Markets

September 2008 will go down as one of the most gut wrenching rides in stock market history. I remember during the tech boom when many analysts said that the fundamentals were thrown out the window during those lofty times. These days, it seems as if fundamentals have also been thrown out the window, but in the sell side direction. The famous words of economist John Maynard Keynes ring so true these days, “The market can stay irrational longer than you can stay solvent.”

For those who have kept capital on the sidelines for these once in a lifetime opportunities, then kudos to you. When I refer to “capital” I am talking about plain old cash, and not the pretend stuff coming out of a HELOC. My next set of plays will involve easing into the SPDR S&P500 ETF (SPY) over the course of the next year, to year and half. I will be taking up equal dollar positions in the S&P 500 every quarter, if it gaps down more than 5%. This will come up to about 4 to 6 buys. I don’t know where the bottom is, but the downside risk is decreasing by the week. A study of the last 3 market crashes in history helped with my strategy. I wanted to see what happened 12 months after the S&P 500 hit bottom. Now I won’t pretend to predict a bottom, but easing into it is more of a possibility (I took up my first SPY position a few days ago… could have waited.) One year after the tech bubble crash, the S&P 500 rose 28%.

One year after the Asian currency crisis, the S&P 500 rose 21%.

And this is what happened one year after “Black Monday”:

Let’s hope history treats us kind.

Stock position: Long SPY.

Comments

[Pretzel Logic:]

If this is a "generational crash" as some are saying, you might do better to compare what happenned after 1929.

2008 Oct 12 06:54 AM

[BlueOkie:]

Hope you are not trying to time the market! What will you do if the SPY goes up 10%?

2008 Oct 12 10:30 AM

[David Tsao:]

I was thinking about checking out the time frames around 1929, but there was one specific reason why I didn't. Many of the instruments available to governments, banks, and other institutions were not available back then.

The recent interventions aren't saying much to tame the market's wild rides... but over time the newly injected capital should drive a wedge into the fundamental economic situation and hopefully bottom out.

As for timing this, that depends on your frame of reference.

2008 Oct 12 11:27 AM

[CLH:]

Smart Stops---Exit strategy? Look at the volume on the biggest down day. The majority of investors exit at the bottom or close to it. never sell during panic. The last time to sell was Oct. 2007. Better to hang on now.

2008 Oct 12 01:12 PM

[y3115y:]

It will rebound, may be 10% and then waiting for the recession with co income and job to fall. The DOW will be lower, The p/e is now 17. It was 7 in 1974. If we would have to repeat the history, we have to wait for another 60% drop. It looks impossible, but think if co.income drop 25% and unemployment rate double from now. We just have more economic problems this time, is not simple problem like in the 30s (barrow to buy stocks,) 70s due to oil inflation, and now barrow to nuy house. Average every American barrowed $20,000 from China, how could we pay them back without using inflation or default? They should use the money to buy America that is on sale now, and be our boss though we are used to have a third world boss. We spent too much we don't have, and we love politician s who cut our taxes and thinking Reagon was great, he cut a lot of taxes for sure. He did not, he barrowed from overseas to expand his military hardwares.

2008 Oct 12 01:43 PM

[henarl:]

"Septermber 2008 will go down as one of the most gut wrenching rides in stock market history" ......Hey, October aint over yet!

2008 Oct 12 04:39 PM

[Urbane Gori...:]

You know, it seems to me that Dubya is the CEO of our country. Shouldn't Cramer take down all the CEOs off his "Wall of Shame" and replace them with George Bush.... You know... A nice photo of him stuttering while wearing a flack jacket on the deck of an aircraft carrier with a banner behind him reading "Mission Accomplished" .. Course, he really hasn't completely devastated our country yet, so maybe I'm a little early....

jegan

2008 Oct 12 04:56 PM

[henarl:]

Hey John, there's still a couple of months left for Dubya to "accomplish" even more. Maybe Paulson and Bernanke can help him with that final accomplishment.

2008 Oct 12 05:44 PM

[InvestorDas...:]

This looks a lot more like 1962 to 1983, flat for 20+ years. 1943 to 1962 was a nice bull run, just like 1983 to 1999. Flat means that a buy-n-hold position ends up with zero capital gains. But during those 20 years, there were many up 100% then down 50% swings. We seem to be experiencing periods of about 7-8 years now (period = time from a high to the next high) versus the 3-4 year periods of the '62-'83 timeframe.

Given those beliefs, we will be due for a nice bull run again starting in 2037.

2008 Oct 13 11:06 AM