Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Why We Still Haven't Reached Bottom


Assessing the rally's strength, identifying new leaders.

Investors are marking time and waiting for second-quarter earnings reports to be published -- but it isn't yet clear whether these reports -- along with commentaries, forecasts, and corporate guidance -- will provide enough supporting evidence to justify the stock market's anticipatory rally since early March.

In the meantime, I have a productive exercise with which you can entertain and inform yourself while stocks lurch around in a short-term, digestive trading range: Try monitoring the relative performance of key areas of the market to see whether any signs of rotational strength and weakness are forming.

This brings us to our main point: One of the rally's weaknesses has been the modest base and limited number of technical signals upon which it was built.

For example, when most indices made new lows in early March, only emerging markets failed to confirm them. This divergence -- the first since the bear took hold -- provided the market-action rationale for those of us who declared that stocks were way oversold and due for some upside action.

Along with a handful of other strategists, I considered this -- along with the high degree of investor pessimism and the record sums of money sitting in near-0% money-market funds. In doing so, I correctly predicted that the upside in stocks outweighed their risks. But there's a fly in this bullish ointment.

Based on the limited number of positive technical signals at the time, the rally that followed was more than technicals could ordinarily justify. Moreover, the main rally leaders -- the financials -- were also the leaders of the erstwhile bull market -- which isn't what typically happens when a new bull market begins.

What you usually see in a bona fide bull market is new leadership formed out of rotational relative strength, which occurs as stocks make unconfirmed lows. This is what occurred in the bottom of fall 2002 to spring 2003 -- but it's not what happened this time.

So, what did happen? And in which direction are stocks headed?

Many old-school market technicians will say that stocks haven't completed their bottoming process, and will only do so when they break above their bottoming-process trading range -- which, in the case of the S&P 500, is 940 or 1,000, depending on which old-school market technician you listen to.

What this means is that all we've experienced thus far is part of the larger bottoming process. This also means that the bottom-has-been-formed bell can't be rung until the upside breakout has occurred.
< Previous
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos