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Don’t Wait To Hit Bottom
Fifth, stock markets are manic-depressives swinging between fear and greed. Investor sentiment today is extremely bearish: fear dominates. We measure sentiment systematically, so this is an assertion, not a guess. This degree of bearishness is consistent with market bottoms. In the past, it has been wrong to be underinvested and selling shares when the bad news is on the front page of The Wall Street Journal, on the cover of BusinessWeek, and is blaring on CNBC.
Finally, the so-called Authorities, the Federal Reserve and the government, have the knowledge and the powerful tools to avert a plunge into the abyss. They have now clearly signaled they will do whatever it takes to revive the economy. Persistent recessions, deflation and long, devastating bear markets as in 1929 and Japan in the 1990s occur when the Authorities don't "get it." However, the Authorities' actions this time probably will result in higher inflation, as they flood the system with liquidity.
A lot of immoral and even evil things have happened in the credit markets, and there are many reasons to be worried. There is a risk of a vicious downward spiral in asset prices—homes, stocks, fixed-income paper. However, I believe the bad news has been discounted in equity prices. It's important to recognize that the news doesn't have to be good for stocks to rally. It just has to be less bad than what has already been discounted.
Most market lows trace out double bottoms. In other words, stocks fall steeply, rally sharply, then fade again and retest or even slightly undercut the first bottom. Key markets around the world made lows at about current levels on Jan. 22 and then rallied, only to fall back as the credit crisis deepened. They are currently laboriously testing those January levels. If they hold, it could be a signal that a strong rally is coming.
There is a huge amount of liquidity on the sidelines, and the most aggressive investors, particularly hedge funds, have massive buying power. They cannot afford to miss a sustained rally. Manics can have violent mood swings. Fear can quickly become greed. The upturn could be explosive.
There is an old trader's saying: "If you think it's a bottom, it's not. If you know it's a bottom, you missed it." In other words, if you wait until the storm clouds have cleared and markets are healthy again, it will be too late. Admittedly, I'm an optimist—but I'd say buy some blue-chip stocks now.
© 2008
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Member Comments
Posted By: pochero @ 03/25/2008 7:52:29 PM
Comment: What a refreshing read! Like a cool, tall drink of water in the middle of the wilderness.
Posted By: Holly Garfield @ 03/22/2008 12:17:54 PM
Comment: There is another point of psychology that indicates we may be near bottom. The US is addicted to spending. We have been hearing about recession, recession, recession for some time now. While there are signs of a slowdown there is a great deal of real estate out there that has not fallen, or fallen little, in price. After a while we get tired of hearing about spending cutbacks, and start spending again. Jobs ahve held up pretty well, so people are continuing to get paychecks. Now Bear Stearns has at least survived, and other big investment banks have beat estimates. That should add more confidence to the financial sector. Credti loosening should start almost immediately. I expect that weekly indicators won't show improvement until about mid April since we won't have a full week to report until then, and monthly indicators won't show until May, since the news is happening too late to affect March readings. Quarterly indicators won't show until July, since the first quarter is just ending. If you wait until the indicators to show any turnaround, if it is happening now, then you'll misss a good bit of the upside. We are so far down that the first few days or weeks of the turnaround will have very big jumps. And, of course, the pessimists could be right.