Dear Professor Sadana,

Now that the S&P 500 has declined over 40% from the peak and the market has had a 10% rally from its October 10th lows, do you think the bear-market bottom is in?

-Minyan Maya


Minyan Maya,

It was indeed a spectacular bounce off the October 10th low. Of course, the market broke all support barricades on the way down, and broke new ground in numerous oversold readings. It was only logical that we'd get an impressive bounce -- one for the history books -- after getting those extreme oversold readings.

Now the quest for a bear-market bottom begins. I'm looking for sustained and aggressive buying interest across multiple industry groups, even after the oversold bounce has run its course. I would like to see a combination of the following conditions to decide if the bottom is in:

1. The market needs strong leaders. In the March-May 2008 bounce, we had leadership in sectors such as:
 

• Oil: US Oil (USO)
  
  
• Natural gas: US Natural Gas (UNG)
  
  
• Agricultural chemicals: Potash (POT), Monsanto (MON), Mosaic (MOS)
  
  
• Steel stocks: Arcelor Mittal (MT), US Steel (X), Schnitzer (SCHN)
  
  
• Select techs: Apple (AAPL), Google (GOOG), Research In Motion (RIMM), Baidu (BIDU)
  
  
• Solar stocks: First Solar (FSLR), Energy Conversion Devices (ENER)

Nevertheless, the broader market didn't participate enthusiastically in this selective rally, as evidenced by various indicators, including the advance-decline line. Similarly, in the July-August 2008 bounce, the sectors that led the rally were financials (XLF), retailers (RTH) and housing (XHB), to name a few - but without strong broader market participation.