Is The Market Bottoming?

Is The Market Bottoming And Nobody Knows It?

By David Banister | 25 February 2009

If you're at all like me, you're a bit tired of the negative headlines and the media frenzy that goes with it. The economic data is horrible and consumer confidence readings are as low as 1981-1982 before the last bull market began. The bulls vs. bear investor sentiment surveys have been running consistently high patterns of far more bears than bulls for months now. The news is unlikely to get much better for several quarters at least.

With the above said, I'd like to make a contrarian case that a multi year cyclical bull market is now possible. This opinion is based on historical criteria normally associated with bear market bottoms, as well as my own formulations that I have added. If you'll "Bear" with me, let's address some of those now.

1. The 2002-2003 bear market ending patterns looked technically very similar to what we are seeing in the 2008-2009 window. I've focused on the Russell 2000 "small cap" stock index as one of my proxies. In 2002 there was a bottom in early October, a multi-week rally, and then a multi week decline that nearly tested the October 2002 bottoms as the market bottomed in early March of 2003.

In 2008 there was a bottom in late November, a multi week rally into January 6th and, so far, a multi week pullback to test the Nov 2008 lows, although still about 12% above them. In both instances, the Russell 2000 index retraced a Fibonacci 78% of its initial rally off the lows, before proceeding higher. As of last Friday, the Russell 2000 index had indeed retraced exactly 78% of its Nov 21 to Jan 6 initial rally.


2. Consumer confidence index surveys are running at 27 year lows and virtually identical to the readings in the 1981-1982 window before the last long bear market ended. After all, markets bottom when everyone is negative and they peak when everyone is confident. In the fall of 2007, consumer confidence figures were running at decade level highs before the market rolled over.


3. Interest rates are at near historic lows, investors are hoarding US Treasuries and Gold for safety, and there is nearly $8 Trillion in "cash equivalents" on the sidelines, some 74% of US market capitalization!


4. Bank stocks are at multi decade lows, the outlook is horrible, and sentiment is worse than 1990-1991 in that sector.


5. Jeremy Grantham, the famous long time bear is now going cautiously bullish. Typically when the "perma-bears" finally go bullish, markets are bottoming out[!?!]


6. The SP 500 index is perhaps the best barometer of all. This index has just gone through a "Fibonacci" eight year cycle of peak to trough to peak to trough. Elliott wave analysts would call this an "A B C corrective pattern".

The 2008-09 lows are very close to the "A wave" 2002-2003 lows, and this forms a pretty clear chart pattern on a 10 year monthly chart. Elliott identified these (human) 'herding' behavioral patterns as common to corrections, whether in the very short term or very long term… the patterns indicate a possible bottom in sentiment of the crowd and a signal to go long.



[ Normxxx Here:  Warning: sentiment indices should never be used for timing; only for corroboration of established IT and LT price trends. A sentiment index is never so low (or high) that it can't go lower (or higher) or, in any case, plateau indefinitely.  ]

These are just a few of many instances I could give of apparently bottoming indicators. Obviously the stock market itself remains your best forecaster of economic peaks and valleys. As of today, the market doesn't yet seem to be predicting a bottom in the economy. Perhaps consumer confidence can fall further (or remain here for some time) before finally turning higher. This bear is already much different from the 2000 - 2002 bear.

Going all the way back to 1981-1982, the concern then was over high interest rates and inflation. This time around we have low interest rates and the concern is over deflation. The rubber band was stretched one way in 81-82 and it's the other way now in 08-09. These extremes usually revert towards the mean, so one could surmise inflation will start to come back soon along with higher interest rates.

What does it all mean? I'm a believer that human behavior has more influence over the intermediate and longer term movements of the stock market than is usually supposed— not earnings or interest rates or other traditional measures. When the herd is entirely pessimistic, consumer confidence is the worst in 27 years, and we've had 8 plus years of a massive trading range market with negative net returns... perhaps it's time to get bullish.

I've included a few charts showing the 2002-2003 Russell patterns compared to 2008-2009. The other chart is the long term 10 year S and P 500 index chart showing the ABC pattern aforementioned. Feedback on this article would be much appreciated and can be addressed to dbanister@cox.net.

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Normxxx    
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