Have We Hit Bottom Yet?

We here at The Kelly Letter have been buying into weakness, such as what we saw yesterday. That’s not the only take on this market, though. In the interest of offering a well-rounded view, here’s a different perspective from frequent site contributor Dave Van Knapp of SensibleStocks.com, sent to his readers on Tuesday night:

Have We Hit Bottom Yet?

The market is down so much from its October, 2007 highs that many pundits are cautiously exploring the question of whether we’ve hit bottom yet. Statistics are being trotted out regarding the average length and decline of bear markets in the last 20, 50, or 80 years. Or what the lowest P/E ratios, or highest volatility levels, were in previous bear markets. Stuff like that.

It turns out that this is a rough bear market, but it is neither the steepest drop nor the longest-lasting. It’s somewhere in the middle.

There has been a sort of leveling off in the past couple of weeks, since October 10. That’s clear if you look at the daily closes. If you include all intraday activity, however, there has been so much volatility that even the leveling off looks sketchy. Intraday activity exceeding 5% from top to bottom has not been uncommon.

You know what? We will not know when a bottom has been hit until after it passes. That’s the only way anyone ever knows. Until then, any claim that a bottom is at hand is nothing more than a guess. The guess may be educated, and it may be supported by impressive logic, but it is still a guess.

Markets being markets, it does not matter that we have been in a bear market mode for 12 months now, nor that we have dropped 38%. Nor does it matter how those numbers compare to other bear markets. Every bear market is sui generis.

Just because we’ve dropped 38% (to 955 on the S&P; 500) does not mean we could not drop another 38% (to 592). Just because we’ve been getting crushed for 12 months does not mean that we could not get crushed for another 12 months. Just because logic says one thing does not mean that emotions like fear and panic might not prevail.

It is said by some that because we have dropped so much for so long, we must be closer to a bottom. Well, that’s true: you can’t drop below zero, and we’re closer to zero than we were 12 months ago. But it does not tell you much.

The real question is whether the recent leveling off represents early signs of a market recovery or is just a garden-variety pause before continuing the trip down some more. Only time will tell.

In the meantime, I would not purchase any stock at this time, with the possible exception of a well-valued long term dividend play. When the market is behaving this badly, I believe in “waiting for the turn” before risking any money in a stock purchase.

As mentioned above, there has been some leveling off in all three major indexes (Dow, NASDAQ, and S&P; 500) over the past couple of weeks, but nothing that could be called a turn upwards. Even the leveling off has taken place amidst massive day-to-day and intraday volatility, often driven by unusual government announcements and interventions. These are not normal conditions, and that makes it very difficult to analyze the market using normal fundamental and technical techniques.

I’d wait a while.

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