March 19th, 2009

The Debate is Settled: The Market Has Hit Bottom

The raging debate is whether the market has hit bottom. My unconditional answer is”yes”.

Have I factored in the economic slowdown? Have I considered the impact of the declining $US? What about the risk that China will no longer accept the $US or US debt? Bet you haven’t considered the impact of the first ever global slowdown its impact on our exports?” I know these questions because I’m bombarded with them nearly every day when I try to convince my “CIO”, my wife, that the market has hit a bottom. How do I know this?

I’m not clairvoyant but the “market” is. Market prices have taken all these risks into consideration today or, more correctly, the millions of investors, large and small, have factored these and many more issues I haven’t even thought of into consideration and determined that stock prices will more likely move up rather than down in the near term. When prices move up too much, investors will stop buying and some might even start selling thereby ending the advance.

The best evidence, though, are the many stocks that have started to break free of the on-going struggle between the bears and bulls that’s caused prices to fluctuate in a narrow range for nearly 6 months. That’s the fertilizer needed to grow a market reversal. A couple of days ago, I posted a spreadsheet with over 60 stocks that had excellent reversal/bottoming patterns (channels, ascending and symmetrical triangles, double-bottoms, head-and-shoulders, cups-and-handles) and with the positive market action over the past couple of days over half crossed the trigger level and generated alerts (click here for spreadsheet).

Here are a couple of examples from the list:

  • DNR (Denbury Resources)
  • XLNX (Xilinx)
  • WFMI (Whole Foods)
  • RRC (Range Resources)

You get the picture. Great chart formations, cross over moving averages, wonderful volume trends and an extended, longer-term reversal. And there are many more where these came from. The situation reminds me of the Fairy Tale with a Happy Ending of November 6 when I wrote:

“It’s merely my best-case scenario, a target, a game plan to follow. The next six months will bring all sorts of real world events that today we can’t even imagine in the economic, international, tax, political spheres. But as they occur, analysts will explain them, investors’ emotional reactions will be reflected in the prices of equity transactions and the talking heads will link them in their Monday morning quarterbacking. ….Clearly, this is a fairy tale with a happy ending. What’s it based on? Nothing more than optimism and hope after 13 months of anxiety and pain (mostly for those who hadn’t moved to the sidelines). If it all comes to pass, it means 6 more months of waiting, of frustration, of waning patience followed on the other side by the reward of opportunities galore.”

I’m having a really hard time sticking with my discipline, though, and resisting the urge to jump into each of the stocks that triggered alerts today. Even though we’re approaching the end of those 6 months and many stocks are now beginning to break to the upside, I’m still cautious because it could still blow up. It’s painful to sit watch these “opportunities” pass you by while you’re sitting on a large chunk of idle cash but the prudent thing to do until the market tells us otherwise. We’ll have a second opportunity soon.

Nothing moves in a straight line. After their initial breakouts, there’s a high probability these stocks will temporarily stall out (it’s called “buyers remorse”) and return to test as support the trendlines that are now resistance. And when the test is successful and the upward trend is confirmed, that’s when we’ll jump with everything we have.

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