Why the Market May Not Have Reached a Bottom Yet

OK, we know we're in the midst of an unprecedented financial crisis. We know that consumers are cutting back, and that the economy is shedding jobs. Almost everyone has lost a decent chunk of change in the stock market, but one question still hasn't been answered: Has the market reached a bottom yet?

While we'd all like to believe we've seen the worst in red ink, there are some indicators that the market hasn't quite found its footing. Indeed, we may see a few more drops before it stabilizes.

Stormy economic forecast
The biggest obstacle that the stock market faces right now is economic uncertainty. No one knows whether this downturn will be short and shallow, as in 2001, or deep and prolonged, as it was in the early 1980s. Right now, it's looking more like this will be a deeper, more painful cut into our economy.

The upcoming Labor Department report will likely show an unemployment rate of 7% -- the highest it's been since 1993 -- according to Bloomberg. Ford Motors (NYSE: F  ) announced a 32% drop in revenue during December, along with plans to reduce their North American workforce by 10%. Ford is in good company, with Merck (NYSE: MER  ) , Goldman Sachs (NYSE: GS  ) , Whirlpool (NYSE: WHR  ) , and Yahoo! (Nasdaq: YHOO  ) also recently announcing layoffs.

On other fronts, the ISM November manufacturing index has fallen to its lowest level since 1982, and the service sector has fared little better. The services index, which accounts for roughly 80% of U.S. economic activity, fell to its lowest reading since its creation in 1997. Consumer spending has fallen off a cliff as worried families retrench and prepare for the worst. The sad truth is that the economy will likely get worse before it gets better. The market has already priced in at least a mild recession; but if the economic data continues to disappoint, we could see new lows for stocks.

If S&P 500 earnings fall to $60, as NYU Professor Nouriel Roubini expects they will, and the S&P's P/E falls to 10, the index could easily trade for $600. That's about 20% below its November lows, and 35% below today's prices.

Volatility is king
Another indication that the market is not showing any sign of settling down soon is the incredible level of volatility we've encountered in recent months. The market's Jekyll-and-Hyde trajectory has left investors breathless, with 700- and 900-point drops and gains in a single session. Individual stocks have been buffeted, too, with names like Genworth Financial (NYSE: GNW  ) and Mentor Corporation (NYSE: MNT  ) encountering huge trading volumes in December, on the order of 15% and 74% of shares outstanding, respectively!

While the CBOE Volatility Index -- aka the Wall Street fear gauge -- is down significantly from November, it's still pretty much off the charts. Historically high levels of volatility are a good indication that we haven't worked the panic out of the market just yet, and that further declines may be in the works.

The bright side
So is there any good news in this giant mess? Well, our economy undoubtedly faces an uphill climb in 2009. But we've learned at least one lesson from history: The stock market typically heads north long before we have solid evidence that the economy is improving. That means that the rebound will likely begin while things still look dark -- and that no one will be able to precisely call where the market will bottom. Investors who are waiting for some kind of economic signal are likely to miss out. The only way to be sure you're in the game when the market starts heading back up is to be in the game now.

Of course, if you're investing in today's treacherous waters, you may want to have a little guidance. The Fool's Champion Funds investment service -- which has beaten the market by seven percentage points on average since inception -- can show you how to invest with the best talent in the mutual fund industry and beat the market while doing it. You can preview this winning service with your free 30-day trial today.

Amanda Kish heads up the Fool's Champion Funds newsletter service. At the time of publication, she did not own any of the companies mentioned herein. Click here to find out more about the Fool's disclosure policy.


Read/Post Comments (4) | Recommend This Article (43)

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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 January 05, 2009, at 4:33 PM, 181736065 wrote:

    Good article!

    "If S&P 500 earnings fall to $60, as NYU Professor Nouriel Roubini expects they will, and the S&P's P/E falls to 10, the index could easily trade for $600. That's about 20% below its November lows, and 35% below today's prices."

    The only way the market will not fall is if "expectations" for a turn-a-round overcome earnings reality - thereby negating this logical discount.

    Oh, check that, based on what the government has been doing, they may actually come in and "buy" the stock market to "prop it up".

    We live in strange times, indeed.

  • Report this Comment On January 06, 2009, at 8:57 AM, johnst1001a wrote:

    Good time to be nibbling back in. Dollar cost averaging, buying some now, some more later might be a good technique, particularly if you feel the market might go down significantly again.

  • Report this Comment On January 06, 2009, at 12:57 PM, bigkansasfool wrote:

    Article is a few months late. Volatility is indeed very important, and it is plummeting.

    The VIX is at 38.25 today, which is less than half the record 80 it set in mid November. It's still not below 20 where it needs to be for a bull market, but it is heading there and getting there quickly.

  • Report this Comment On January 13, 2009, at 9:24 PM, Chieflotafart wrote:

    This bounce, whether called a dead cat bounce or bear market trap has come as a result of false hope from the 350 Billion installment in TARP and the ever hopeful change of a new administration. The banks have been propped up long enough for them to collect bonus' but the banks are burning from the easy loan policy that got them into trouble, and they are making d$#med sure the keep enough of that TARP so the can collect bonuses next year. No loans for economic expansion. Just count the numbers of jobs being cut. I read about Billions being 'loaned' t the AIG's and CITI's, then except for the Bear Stearns sale being some 10 B. The sell off af devisions are in the millions. The remaining shell is going to be valued at the bailout money, with little by way of value. What is then left for earning power. Never mind 'payback' A now listed deficit of 1.2 Trillion for this fiscal year, competition for the available investment dollar is going to be fierce, driving up the cost of borrowing. I suspect even if the treasury tries to buy a market 'prop up', we sill see the DOW at 7000, before we see it at 10,000 again.

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