How to Recognize a Bottom

How to Recognize a Bottom

spiral staircaseHopefully by now, you are not tempted to jump out of your window, even a basement window, because of the financial markets. This looks to be a pretty normal correction, pullback or whatever else a temporarily falling stock market might be called.

The most pronounced one of 2014 was seasonally right on time and occurred between September 18th and October 15th. The S&P 500 Index lost 7.4 percent. The Dow Jones 30 Index dropped 6.59 percent beginning a day later. The rebound began on the 15th or 16th of October and lasted until both reached high points about May 19th to the 21st, approximately 14.2 and 13.6 percent higher respectively. As usual, it turned out to be a pause that refreshes the bull.

But 2015 turned out to be a year in which the financial proverb, Sell in May and Go Away, would have worked well. From mid-May until August 25th, the S&P 500 fell 12.3 percent while the Dow was hit even harder at minus 14.4 percent. Through Tuesday’s close, both stood a little more than 5 percent higher.
Are we out of the woods yet? I would say that we are probably not. Most often, the worst low of August 25th would again be challenged. The next drop would not need to be as low as the intraday plunge on the 24th or the closing low of the 25th, but it will probably have more volume than the drop that occurred last Tuesday, September 1st.

The positive market days since the 25th are good to show that not everyone thinks the world will end—they are buying stocks again after all—but the trading volumes on those days will need to be much higher before you can take comfort that the second bottom is not still ahead. Yesterday’s volume for instance was much too light to count as a reversal of trend.

The bottom line, pardon the pun, is that all is fairly normal at this time and within a few weeks, give or take two, you will also have forgotten this dip just as we forget almost all of them. Sometimes you will see a triple bottom chart formation, but that turns out to foreshadow the same wave motion. The tide does come back in whether you think it will or not.

And with free money in the money system (except for smaller businesses), a cowardly Federal Reserve Open Market Committee, lower unemployment (except for millions of discouraged people not looking for work), and growing economic output both here and in most developed countries including China, I am ready to buy more of the strongest stocks when the indicators tell me it is safer and a little more probable that we have seen the worst.

(Statistics are derived from Worden Bros., Inc. TC2000 software, 2015 and do not include dividends for the periods mentioned. Past performance is no guarantee of future results.)

September 9th, 2015|Categories: Economy, Investment Management, Stocks|