Zignals

10 Reasons Why We Still Haven't Hit Bottom

Technicals do work - the challenge is knowing when to accept or ignore a signal; e.g. in a trending market one should ignore momentum signals while in a trading range one should ignore trend signals. Statistical studies on Technical Analysis show no advantage because the experimental design does not allow for individual interpretation; it simply takes an amalgamation of all signals.

Sentiment (Bullish Percents, Summation Indices and Percentage of Stocks above key MAs) started to peak late 2006 into early 2007, but this came in an environment of end-phase gluttony generated by excessive bullish media leading to a market which tagged on another 15% worth of gains before it truly started to rollover. It would have taken an iron will to have shielded yourself from the news and stepped back.

Now we are in a market where the reverse is true. Both fundamental and technical analysis is getting trashed. The former brutally exposed by the shenanigans of Wall Street which collapsed the validity of nearly every earnings report of companies with a hint of consumer loan exposure; who can trust an earnings report and by association, fundamental analysis now? Where were the Ivy league MBAs or CFAs at calling this mess back in 2006/07? Nowhere. Not even Warren Buffett escaped the carnage and no one would deny his extraordinary sway in been able to formulate a deal at the best possible terms; is anyone blaming Buffett for not calling the top? No - I didn't think so.

Sentiment has sharply recovered from the lows of late last year (new all-time lows at that) but like in 2006/07 where markets made new highs in the face of weakening sentiment, now markets are making new lows in the face of strengthening sentiment.

Cycle analysis suggests a bottom won't complete until early 2010 but on improving sentiment there is ground for optimism. The bigger questions is when will the secular bear market end? Again, cyclical analysis suggests we are only half-way there but at least we can expect a respectable counter rally before we have to start looking downwards again.

Technical analysis is not rocket science, it's a tool to derive risk probability based on the psychology of the market place. Do you think people slapped Barry Ritholtz on the back when he was crying foul on the housing market in 2007? No, he got a far more dismissive response from the same people who think Technical Analysis is nothing more than tea leave reading.

People continue to challenge Technical Analysis as if its some panacea for their own failings; presumably these same individuals lost money using either fundamental analysis, or worse still, relied on others to make their investment decisions for them.

Hopefully the lesson will have been learned and now people will accept the importance of doing their own research, research which encompasses the best parts of fundamental (dividend screening) and technical (sentiment) analysis. It's not to late. Few will have emerged unscathed but at least stocks trade at values not seen in over 10 years. Opportunities will avail of themselves, just don't be throwing what reserves are left at one stock in one day.

Declan