A Critical Week for US Markets? Will A Bottom Be Forged?

A “Bottom” is an indispensable part of the market cycle.

It doesn’t translate to the popular impression of fantasizing about identifying a precise low, which should be the work of tarot card readers.

It means that bottom as a cycle involves time process.

Of course, it is a truism that bottom can always be seen from the privilege of fait accompli.

But in looking forward, anticipating a market bottom can be assessed from valuations view point (example below)…

Courtesy of Bespoke Investment

or from sentiment…

Courtesy of stockcharts.com

or from technical formations or patterns such as W,U,V or other variations based from historical performances...

Courtesy of US global Investors

Courtesy of US global Investors

Courtesy of US global Investors

or a combination thereof.

Remember, there is no simplified answer, formula or a Holy Grail for this.

This also means anticipating market bottoms can also be construed as a bet based on probabilities: that in considering the tradeoff between risk vis-à-vis return, the estimated returns should vastly outweigh risks given an expected time horizon regardless of the day to day activities reflected in the tape.

Courtesy of US global Investors

And perhaps US markets could have been attempting to forge a bottom, where the critical landmark for either a success or failure of market’s attempt to its floor could be shaped or determined over the coming sessions (days or weeks) by virtue of market action.

According to John Derrick of US Global, ``History shows that three-quarters of the retesting events occurred within 44 days of a bottom, so if the October 10 low in fact marked a bottom, a retest (which could create a new low) should be expected prior to November 23. The longest span for retesting a low was 104 days in 2002. A repeat of that extreme case would schedule the retest for January 22, 2009.” (highlight mine)

Of course any successful recovery from the repeated retests of the October 10 lows could also translate to an interim bottom more than the “THE” Bottom.

Although again bottom as a market cycle, like wine, ages with time.

But for the meantime market action says: Fasten your seat belts.

Bear to Bull Converts: Merrill’s David Rosenberg Next?

This article from David Berman of the Globe and Mail (all highlights mine),

``David Rosenberg, North American economist at Merrill Lynch, acknowledges that he remained too bearish for too long after the stock market hit bottom in the fall of 2002. Now, he wants to learn from those mistakes.

``So, even though he believes that valuations are not yet compelling and the economy continues to deteriorate – key supporting evidence for why the stock market may have yet have hit bottom – he's keeping an open mind.

“While I am not yet of the mind to start turning bullish, I think it does pay to pay homage to the many legends out there who had been cautious or outright bearish, and are now starting to change their views that, at the least, the worst may be over,” he said in a note, pointing to Warren Buffett, Jeremy Grantham, Bob Farrell, Don Coxe, and Steve Leuthold.

``He also dug up some numbers to suggest that the bottoming out process tends to be just that – a process that occurs over time, with a number of tests that challenge the low points.

``“Now I don't want to get overly excited, but I may have discovered the Holy Grail in terms of identifying a ‘bottom' that is tried, tested and true as opposed to one that may be a trap,” he said.

``He examined 12 stock market troughs for the S&P 500 going back to 1932. There was always a retest of the lows. On average, there was a 35-day lag between the actual low and the interim peak; the initial bounce averaged 16 per cent. Then, the index goes through a testing process, which also lasts 35 days. During this testing process, three-quarters of the bounce from the low to the interim peak is reversed.

“So the entire bottoming phase – trough to interim-high and then to the retest of the low – usually lasts 70 days,” Mr. Rosenberg said.

“We only know for sure when the low was a fundamental low at one particular moment of time, and that is when the S&P 500 crosses above both the 50- and 200-day moving averages. On that day, the bull market becomes fully entrenched, no questions asked. All 12 times, the market was up and up a sizable amount the following year, by an average of 25 per cent.”

Lesson:

Merrill’s David Rosenberg is clearly having second thoughts about his “super bear” stance in the recognition of the growing crowd of authoritative apostates.

Yet, Mr. Rosenberg wants to be convinced from the market action angle.

His “holy grail” means that this bounce will encounter its next retracement from which should test whether the October 10 low will hold.

There is an approximate 70 days-constituting 35 days for the present upside and another 35 days to the next downside retracement-for the test cycle.

If the retracement fails to take down the October 10 lows then by Mr. Rosenberg’s metrics, the bottom in the US markets would have been established. And Mr. Rosenberg will probably give up his bear market hat for growing horns.

Chart of the Day: US Dow Jones: Worst Annual Decline in History

From Chartoftheday.com:

``Continued concerns regarding the credit crisis, a slowdown in consumer spending, and a further weakening of the US economy sent the Dow down more than 7% on the day. Today also marks the one-year anniversary of the current correction. The Dow put in its record high of 14,164.53 back on October 9, 2007. Today, the Dow closed at 8,579.19 -- down 39.4% from its one year old peak. For some perspective on the magnitude of the current decline, today's chart illustrates how the Dow performed during the first year of all major corrections since 1900. As today's chart illustrates, the first year of the current correction has been more severe than the first year of any correction since 1900 -- and that includes the correction that began in 1929."

Two points of thought:

1. Could the collapse in US stocks signify more than just deleveraging and its economic spillover such that losses have topped 1929?

2. Relative to the Phisix which is down by 45% from the peak as of Friday's close, it used to be far worst, e.g. when US markets fell by 1% we dropped by 2-3%. Have we become low beta? Nonetheless despite the market's rout, the Phisix has held up well. So far so good.