Bear Markets Tend To Retest LowsBy Chris CiovaccoVisit and Bookmark CCM Short Takes - Updated Regularly October 13, 2008
Easy and Neat Bottoms Not The NormThe stock market never makes it easy for investors. Many are hoping Friday marked a nice neat end to the current bear market. While only time will tell, history suggests any stock market low will most likely be marked by volatility and frustration. The following three charts show major stock market bottoms in 1975, 1987, and 2002. In each case, the initial attempt at a market bottom was at least retested in the subsequent months. Given the uncertainty in today's credit markets and economic outlook, it would not be surprising to see "the bottom" made over time rather than in one neat V shape. The historical bottoms from 1975, 1987, and 2002 support a gradual and skeptical approach to investing in stocks. In the chart below, note the strong trading volume on the first low (spike in bar chart).
1987 Crash Quotes"The borrowing has to stop. The market slide was a shot right between the eyes that had better wake us all up to simple fact that we can't keep romping forever on borrowed money."
2008 - Monday's Gains - The Bad News: Weak VolumeMonday's (10/13/08) overdue rebound in stocks was impressive. However, trading volume was light across the board which is not what we would expect at a meaningful low. Monday was a bank holiday, so maybe we can see some big volume later this week. The charts below show (a) the end of the 2000-2003 bear market and (b) Monday's action.
Monday's Gains - The Good News: 9-to-1 DayWhile volume was disappointing, at least the vast majority of volume was related to stocks that rose in price. Monday was a 9-to-1 up day, which can be bullish, especially if we see another 9-to-1 up day in the next few days or weeks. More detail can be found in this MarketWatch article, Nine to One.
Fundamental Reasons To Tread Carefully
Recent bailouts do help address some of the issues, but not all of the issues. Paying attention and keeping an open mind to both positive and negative outcomes remains important. We still face negative GDP numbers in the months ahead. Fear pushed people out of stocks. Fear of missing the "bottom" can push them back in without too much consideration of the bigger picture. Capital should be redeployed slowly and cautiously.
Chris Ciovacco
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