October 1st, 2008

When’s The Bottom and What To Do Then?

A bullish blogger made an admission and asked the following question of us Bears:

Well, the averages are down nearly 30% from the highs they reached last October. Congratulations on your foresight! Now what? I know that most of you are expecting prices to move a lot lower. The most optimistic bearish projection I have heard is 1050, but most are looking for a move below 1000 in the S&P. I have a question for you. Suppose the market does get to 1050, 1000, 950, ….. What will you do then?

I’m going to answer but not in the way that you might think because I don’t have clairvoyance, I can’t predict how far down and I don’t know when it will get there. What I do know and have said often here before is that it isn’t safe now and won’t be until the market itself tells me that it’s safe to return (meaning that risks are sufficiently reduced to warrant to again put money to work in the market in a big way). I can’t predict when that will be or at what level and you shouldn’t listen to anyone who tells you they do know.

You’re probably saying that I’m inconsistent. How can I write one day that the market looks like it’s “headed to 1040” and the next write “I can’t predict how far down the market will go.” To that I respond that there’s a good chance based on technical guidelines (support levels, necklines at 50% of move, etc.) that it could go to a certain point; what it does when and if it gets to that level is unknown.

On May 2 in “Precursor to a Healthy Bull Market“, I wrote

“Before we can become complacent about moving to new high ground, it’s going to take quite some time for this reversal to be completed. The Index could lurch ahead to 1500 but that could be followed with some backfilling. The Index could crawl slowly uphill dragging the moving averages behind it. It took 5-6 months for the averages to flip from the Bull to Bear configuration. We should expect another 6-8 months for it to right itself back to Bull (remember, things happen much quicker going down than they do going up).”

I included the following chart:

My point was that the moving averages in a bull market (left side of chart) are in reverse order from a bear market (right side of chart). It takes a long time for the averages to flip and until they do, whenever that might be and for reasons unknown to us now, the market remains vulnerable.

That was written just before the Index crossed over – for only one day – the 180-day moving average. We cautiously rejoiced and heard talking heads say that I bottom had been put in. And we know what happened since May 2.

I’m just as much an optimist as the next bull, I love buying stocks and I hate the state of this economy and the financial system. But I just can’t own stocks now and don’t know when I will be able to again. Back to the original question: “Suppose the market does get to 1050, 1000, 950, ….. What will you do then?” My direct answer is “I’ll buy the strongest stocks (best momentum) whenever and for whatever reason the market proves that it’s stopped declining. I’ll know the time is right from by the index relative to the moving averages and how those moving averages are aligned.” Sorry, I can’t make it any simpler or plainer.

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