Insights & Advice

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The Bounce off the Bottom was just that

It was all too orchestrated for me to believe. Thursday’s huge turnaround rush into the markets was just another example of investors trying to identify a bottom. I’ve said it before and I’ll say it again–that is not how bottoms are formed.

After several days of continuous selling we had hit a level of the S&P 500 where the market had bounced twice before. When we reached and then broke that level (839) investors panicked and dumped stocks. As the first burst of selling petered out, other investors decided the markets had finally reached that magic number and the upside stampede began. Within two hours the markets gained over 6%. Of course, the next day those latest to jump in have been burnt once again as the stock markets promptly sold off.

As long as investors keep looking for a bottom, it will elude them. Bottoms are made when despair and despondency give way to neglect; when no one cares because everyone is convinced that the markets are never, ever going to come back in our lifetime. So stop looking for a bottom.

October’s economic numbers are coming in every bit as bad as I feared. Retail sales were down by a record amount, unemployment was worse, confidence weaker, new layoffs higher and Best Buy said they had never seen business this bad since starting the company. Its competitor Circuit City when belly up at the same time.

This weekend president Busch plays host to an international Group of Twenty nations who will converge on Washington to deal with the global meltdown and how to prevent one in the future. No one is looking for anything much out of this shindig. But it will present an opportunity for other nations to point their fingers at the U.S. and tell the media how it was us that got them into this mess. Although it will play well back home in whatever Hood they come from, it won’t do much to solve the world’s pressing problems or develop a formula for coordinated action.

Next week we will also hear the verdict on the bail-out of the Big Three automakers. Detroit, which has already been promised one $25 billion loan, is asking for another $25 billion or so from the government (see my column “Why the Big Three Should become the Big One”). Although many in Congress are sympathetic to their request, there is a group of dissenting members that appears to be growing. As of the close on Friday, I don’t believe there are enough votes to approve a bail-out. However, you can bet there will a lot of lobbying going on over the weekend so anything could happen.

So how did the markets end up today? All three major indexes finished in the red giving back over half of yesterday’s gains. As for next week, expect more of the same. One small technical matter concerning yesterday’s “bottom” concerns me. The 839 intra- day low was actually broken and yet another new low was established. All year long we have had a series of lower highs and lower lows. Nothing in this week’s action indicates to me that we have broken this pattern. And that usually means more downside.

Posted in A Few Dollars More, At the Market