Following the October 10th bounce, we need to track the emerging leadership and hope that it is broad-based, not narrow and concentrated in just a few sectors and companies.

2. I will be tracking the technical health of the market. Let’s go back to the last bear market of 2000-2002 to discuss the technical-anatomy of the lows. Notice in the following chart, there were many visible lows, but none of them stuck as ‘the Ultimate low’, even though they were followed by massive bear market rallies.


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Check out the following chart to see how "the real bear-market low" was made. It took several attempts by the market to test -- and possibly retest -- while the underlying conditions improved steadily.

We saw July 2002 levels being tested in October 2002 and then again, a higher low was made in March 2003. But unlike the above chart, the market stopped making new lows and successfully defended the low hit in July 2002.

What made the March 2003 level test significant was the positive divergence in many underlying indicators. And in the current environment, we have a range to defend (850-900 on the S&P 500), and we're going to be on the lookout for positive divergences to figure out if it’s going to be the bear market low.


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Even if we look at a 1987 crash scenario -- particularly in light of media calls for the October 2008 market decline as a "cascading crash" -- here’s a pictorial representation of that time. Notice the range bound, choppy market that existed till we successfully defended the levels hit on Black Monday, followed by an ascent.

 
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While the October 10th low can hold in price assuming "the floor" has been set in the 850-900 range, we could still be some distance from the final low in terms of time; it might take a few months of consolidation. Just as a person who has a serious accident needs time to recover and recuperate, bottoming formations take time. The time factor will also help the credit market alleviate the severe stress they're currently undergoing.

Of course, in light of recent events, the market sentiment has improved and investors are emerging from "cash-and-fetal position," as Professor Jeff Macke so aptly stated during the Dow’s worst week ever.

While we will see a bottom ultimately, I would be willing to term October 10th as the "ultimate" low only if it successfully passes the retest - and passes it with substantially better market internals and a broad set of emergent leaders, across multiple industries, from the current stock debris.

Till that happens, I continue to tread and trade with caution.

Sincerely,
- Professor Sadana