Is This the Market Bottom?

It's bad out there.

On July 6, the Dow -- an index composed of 30 stalwarts, including Citigroup (NYSE: C  ) , Microsoft (Nasdaq: MSFT  ) , and Intel (Nasdaq: INTC  ) -- was more than 20% off its highs ... making this an official bear market.

Today, the Dow dipped below 11,000 for the first time in two years. Oil spiked to an all-time high of more than $147 a barrel. The dollar remains in the gutter. On top of that, consumer confidence has plummeted; according to a recent CNN poll, three-quarters of the country now believes we're in a recession.

It's enough to drive you to chocolate chip cookies.

Defining the bottom
So is this the market bottom? To attempt to answer that question, I did what any red-blooded American would do: I went to Wikipedia.

According to Wikipedia, "It can be hard to predict a bottom when a market is still in the decline. An upturn is sometimes a false upturn, after which decline resumes."

Umm, OK. Fortunately, it gets better
If you were to attempt to predict a market bottom, you would want to find the following (again quoting Wikipedia):

  • "The market has fallen sufficiently such is the current value is far from the expected values. [sic]
  • The market is not likely to fall further.
  • A valid uptrend has started."

Let's tackle these in reverse order. A "valid uptrend" has most definitely not started. The market is bleeding again today, as it has slowly for the past eight months.

Is it likely to fall further? Any honest answer to that question is about as reliable as a flip of the coin. So let's just say it's unclear.

To the first point (and assuming I'm reading it correctly), it does appear that the valuation of stocks is out of whack with their current prices. There are certainly instances where that's murky or even false -- financials come to mind -- but by and large, valuations today are more attractive than they've been in a while.

So we have that going for us ...
Using that three-step process, I unfortunately can't claim that this is, in fact, the market bottom.

What I can say, without doubt, is that people are pessimistic. Things are so bad, in fact, that the "Most Emailed" article on nytimes.com the other day was not about the election, Iraq, or even global warming.

It was a recipe ... for chocolate chip cookies.

A chocolate chip cookie recipe is certainly not airtight, bullet-proof evidence that a bottom is here. It does suggest, though, that people are so pessimistic that they're flocking to comfort food.

How to approach the market -- bottom or not
While people everywhere were looking to chocolate chip cookies to make their day, another, more uplifting story went underreported. That was about the death of billionaire investor and philanthropist Sir John Templeton (we'll get to the uplifting part in a moment).

Sir John was nothing short of the world's most important investor. He led the charge into global equities and proved that you can earn incredible returns by adding new money to the market on a regular basis, broadly diversifying your portfolio, and being willing to buy when others are not.

His example is an inspiration (here comes the uplifting part), particularly during volatile markets like this one. As he wrote in a book on investing strategy, "To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest ultimate rewards."

Do you have the guts to do that?
This, of course, is not necessarily the easiest course of action and it certainly doesn't always work out to cherries and sunshine. Plenty of people bought shares of Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) back in May when these stocks were trading around $30 per share -- and they're down some 70% since then.

Investors thought these were contrary picks where too much pessimism was already baked into the stock price. After all, we'd heard for months that the federal government would never let these quasigovernmental giants of the mortgage space actually fail. Or would they?

It's clear today that Fannie and Freddie are going to need more capital, and even the people who bought when others were despondently selling have seen their stakes sliced in half.

But that was then
It's since gotten so bad, however, that you don't need to tread in the precarious waters of the mortgage market to find significant value opportunities. Because everything has gotten whacked. And while I wouldn't go so far as to call Google (Nasdaq: GOOG  ) a "value" opportunity right now at $540 per share, back in March it traded down to almost $400 -- where, given the growth and strength of the business, it started to look pretty darn attractive.

In other words, I'm not recommending you buy Google now, but you should make a list of strong, debt-free, growing businesses you'd love to own and the prices at which you'd love to own them. Then watch them like a hawk. Given the despondent selling going on out there, you may get them at prices you never thought possible.

Here's another name for ya
That's what we're doing at our Motley Fool Hidden Gems small-cap research service, and Chipotle (NYSE: CMG  ) is precisely the kind of company we're talking about. This well-run business, which has a McDonald's pedigree, is virtually debt-free, growing like wildfire, and generating more than enough free cash flow to fund new stores.

Yet the stock has been sold down more than 50% -- as have many small companies -- because the market is skeptical that this small (yet superior) business has what it takes to keep succeeding in a recession.

But we love the opportunity to pick up fantastic and simple businesses like this one when the market is uncertain about their performance over the next 12 months. Why? Because we're more concerned about Chipotle's performance over the next five to 10 years -- and we believe it will do fabulously over this time frame.

If you'd like to take a look at the other superior small caps that we think are incredible long-term opportunities at current prices, click here to join Hidden Gems free for 30 days. You can read about all of our research and recommendations without any obligation to subscribe.

Tim Hanson does not own shares of any company mentioned. Microsoft and Intel are Motley Fool Inside Value recommendations. Chipotle and Google are Rule Breakers selections. Chipotle is also a Hidden Gems pick. The Fool's disclosure policy verified that the aforementioned chocolate chip cookie recipe is actually pretty darn good.


Read/Post Comments (7) | Recommend This Article (29)

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 July 11, 2008, at 8:15 PM, whersyerbobnow wrote:

    Beware of Wikipedia. It is ran by its users. Beware of ANY information source ran by the herd.

    -Roman

  • Report this Comment On July 13, 2008, at 2:37 AM, EaglesonUK wrote:

    Good advice, but I don't see much risk in this case. Wikipedia is not predicting the market bottom, just providing a little common sense about what constitutes a market bottom.

    I would add that a market bottom only reveals itself in hindsight. Like air raids and tornados, it's much easier to predict one when it's over.

    The only thing that can be predicted reliably is the overall performance of the stock market over a time period of years. I am much more certain that holding stocks through the current downcycle will ultimately result in growth. As long as we've picked fundamentally sound stocks that can handle the roller coaster market, we will be in good shape. Just try not to throw up too much during the ride.

  • Report this Comment On July 13, 2008, at 5:23 PM, Boo2007 wrote:

    Сегодня кто в проигрыше? Кто раньше одалживал деньги для разных нужд, сейчас при падении доллара имеет проигрыш.

  • Report this Comment On July 13, 2008, at 9:36 PM, skipperschipper wrote:

    The market still hasn't solved the fundamental problem: OIL. Oil will continue to rise in price, causing cost-push inflation, and limiting growth. The solution to this problem will be massive shifts to alternative energies. Until that happens, look for the market to trade sideways to down for at least 2 years. If, indeed, the market can pull out of this dive soon, look for small caps to lead the pack.

  • Report this Comment On July 14, 2008, at 10:10 AM, Y0daIam wrote:

    You guys are quoting Wikipedia now? I'm starting to see a lack of quality research and insight that used to be written in MF stories. How about some stats from historical bear markets and market factors around that time?

  • Report this Comment On July 14, 2008, at 10:35 AM, bugsdaddy wrote:

    Wow. And I thought the FAA had the definition game wrapped up:

    Crash= Uncontrolled loss of forward momentum at zero altitude.

    Anyway, cute story, but of no added value for those of us trying to learn somehting about how to deal with these markets. Come on guys.........

  • Report this Comment On July 17, 2008, at 4:46 PM, cocoanlace wrote:

    Fool.com is supposed to

    Educate, Amuse, and Enrich.

    This is the Amuse part.

    And I enjoyed it more than I would a chocolate chip cookie.

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