6 Classic Signs of the Market's Bottom

Thank goodness for the weekend.

Not only did most of us get to have a couple of days off, world stock markets were closed. No more plunging markets. Your portfolio couldn't go down any further over the weekend. And in fact, the market's rallying so far today.

Phew.

However, if you are like me, you probably used parts of the weekend reflecting on the quite amazing events of last week. Without doubt, it was the most turbulent and at many times stressful week of my 20-year investing career.

It's worth rewinding a little past just last week. On Sept. 19th the Dow Jones Industrial Average closed at 11,388. At the start of last week, Oct. 6th, the Dow stood at 10,325, meaning it was already off over 9% in the previous 10 trading days.

What made last week even worse was that many portfolios were already bleeding before the carnage. Stocks like Ebay (Nasdaq: EBAY  ) , Ford (NYSE: F  ) , General Electric (NYSE: GE  ) and Research In Motion (Nasdaq: RIMM  ) were already significantly off their 52-week highs, in the neighborhood of 50% or more.

Shattered dreams
Then we had the mother of all sell-offs. The Dow finished the week down a whopping 18%, and now sits a massive 36% down to date in this calendar year.

Some of the selling was justified. Some companies will not survive this credit and economic crisis. Others will be sporting large wounds which will take years and maybe even decades to mend, if ever. Some stocks will never again trade higher than they did during 2008.

But much of the selling was indiscriminate. It was random. The baby was well and truly thrown out with the bathwater.

Fear gripped the markets like never before. Right before their very eyes, ordinary people could see their life savings going up in smoke. Their dreams of a comfortable lifestyle, being able to pay for the kid's college education, and of looking forward to an early retirement complete with a well funded 401(k), became nothing more than dreams.

Individual investors bailed out of their own stock holdings, their mutual funds and investments in hedge funds. People who'd used margin loans to juice the returns of their portfolio suddenly found themselves forced sellers.

It was a vicious downward spiral. As the market fell further, more fearful people sold, pushing share prices lower still. That in turn meant more margin calls, and more selling.

And to make matters worse, there were virtually no buyers. Everyone was bleeding. Even those skilled or lucky enough to have cash were not buying in such volatile market conditions.

Down, down, down.

Classic signs of a market bottom
Yet among all this doom and gloom, I saw signs of hope. I don't know if Friday, Oct. 10th will be heralded by historians as the bottom of this bear market, a day on which the Dow hit an intra-day low below 8,000, but I think it might be close.

But some of the classic signs of the bottom of the bear market were there:

  1. Capitulation.
  2. Indiscriminate selling, regardless of valuation.
  3. No obvious catalyst for a bounce.
  4. Mass pessimism.
  5. To date, it's the worst calendar year fall in U.S. stocks since 1931.
  6. The most recent bubble, commodities, has now also burst.

Now I'm not going to get into playing politics, and trying to predict what world politicians will do in a coordinated or uncoordinated fashion to unfreeze the world's financial markets. I'm also not a banker nor an economist. I can't predict what effect government injections into banks will do to the banking system and to the share prices of companies like Morgan Stanley (NYSE: MS  ) , Goldman Sachs (NYSE: GS  ) and Bank Of America (NYSE: BAC  ) .

The good news is that I'm not alone. To date the smartest financial analysts and smartest government officials around the globe have to date had no idea things would get this bad. And they still today don't have all the answers -- far from it!

If only I had $1 million to spare
The other piece of good news is that you don't have to be able to predict the future with 100% accuracy to be able to benefit from this market sell-off.

If, like me, you can't predict what the financial landscape might look like in two years, let alone in two days, then you should definitely leave banking and financial stocks alone.

There are plenty of other companies out there right now that will continue to grow and prosper in the years ahead. Sure, there's a recession coming -- I reckon it's here right now -- and many companies will struggle to materially grow their profits over the next one to two years, maybe even longer.

But in some cases, this is more than already baked into share prices. I am seeing quality companies with high profit margins operating in industries with attractive long-term economics trading at downright cheap prices.

If only I had a spare $1 million to seriously do something about it!

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Fool contributor Bruce Jackson doesn't have an interest in any of the companies mentioned in this article, although over the long-term, he does have an interest in the market rising. The Motley Fool's disclosure policy had a calm weekend too.


Read/Post Comments (6) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 13, 2008, at 10:32 PM, poorartists wrote:

    So now, the Motley Fool is just hawking it's own for-fee investment services and passing it off as objective advice!

    I expect better from the Fool. You used to be about empowering the individual investory. Sad to see you've stooped to trying to make a buck off of fear and uncertainty. The Fool has become the Monarch--who will tell the truth now?

  • Report this Comment On October 13, 2008, at 11:17 PM, disaster2008 wrote:

    Oh great, last week was the end of the world and now all the problems have been solved. Friday was not the bottom. The market will be all over the place this week and we will be lucky to be above last Friday's close. Significant uncertainty with large does of fear pushing the will be ruling the herd for a while. The market will test new lows at least two more times. If you are going long, set your buy points low. If you wanted to get out to regroup, now may be the time, there will be better opportunities to those that are patient and contrarian.

  • Report this Comment On October 14, 2008, at 7:57 AM, nilshp wrote:

    Never mind a $1,000,000 - even a spare $10,000 would be very well-invested in any of a myriad of bargain-priced value stocks right now!

  • Report this Comment On October 14, 2008, at 11:31 AM, megalon81 wrote:

    Look, folks-- even Motley Fools have to make a living. The great thing about Fooldom is that this crowd headlines the fact when they are trying to sell you something. Like TV, these guys have commercials-- but they are clearly such. TMF tells you to read carefully and make your own decisions. If you don't want to buy their products, fine. If you think everything TMF says is a "hidden commercial," stop reading and go elsewhere. As for me, I try to "speed read" past the labelled commercials, ponder and investigate analyses that I find interesting (pro) or questionable (con)-- and I find myself learning.

    In this case, the "classic signs of a bottom" is what caught my eye. I've heard about such signs, and they all seem to me to be, essentially, "When things look absolutely the worst, that may be the bottom." Well, yeah-- once things have gotten to the point of absolute worstness, there's no place to go but up. But what i'm really looking for is something quantitative: e.g., when x number of a certain set of stocks (pick an index) are valued below a certain level (pick your metric-- intrinsic value, price to book, P/E, or whatever), history shows that a bear market has run its course/ a crash has bottomed/ the market is going to recover (or whatever you are looking for).

    I didn't find that in this article-- that's okay. By reading and thinking about it, I'm a little bit clearer in my own mind about what I'm looking for.

  • Report this Comment On October 15, 2008, at 1:34 AM, TrailerParkJawa wrote:

    Even if we've hit a bottom, who has extra money at a time like this? All I have is what I'm putting into my 401k each month. Okay, I do have an extra $2500 but that isn't much and I'd almost rather use it to pad my emergency fund or vacation.

    I guess what I'm saying is that when times are darkest the average person is often caught up in the storm and doesn't have the means to take advantage of low prices since a lay off could alwasy be around the corner.

  • Report this Comment On October 16, 2008, at 5:23 AM, JudasTouch wrote:

    You forgot the 7th classic sign of the market's bottom, Bruce:

    When you can see its little thong peeking over the top of its jeans.

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