Analytics
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24 August 2011
How to Find the Market Bottom
finance.yahoo.com "Are we there yet?" It's a question gratingly familiar to any parent who's taken the kids on a road trip. These days it's the query flooding the Breakout inbox as investors look for something hopeful to cling to in the face of nearly unprecedented volatility. Scott Bleier, founder of Create Capital Advisors, says we aren't there but we're making progress. Ironically, one of the obstacles to finding a low is the market-friendly Federal Reserve.
Washington, D.C. has been propping up stocks for so long, Bleier says people forget what an actual bear market is like. The most recent examples of this manipulation are the much-discussed Quantitative Easing policies of recent years, after which, Bleier says, "every dip is bought." Until it's not.
As each of the last QE's finished, the rallies ended and the S&P started moving in 200 pt ranges, or nearly 20%, as traders awaited more. If we get more QE when Bernanke speaks on Friday we may see yet another short-lived rally but it won't convince Bleier that the bottom is in.
We need a real bear to wring out the shiny-happy feeling investors have and that can only come when the Fed stops playing enabling parent. "A real bear market has to start with the withdrawal of the magic Fed angel dust," says Bleier. In other words, set the market free to find its own level. It's not going to be pleasant but at least it will be real. Markets having to find their own lows will be a positive, even if it causes many investors to lose faith.
In the near-term, and failing a burst of Fed tough-love, there are two "tells" for a trading (read: non-sustainable) bottom, according to Bleier. Seeing "high volume on increases and low volume sell-offs" is your first classic hint. Low volume on rallies suggest more of an exhaustion of selling than it does real enthusiasm for stocks. The recent rally to 1,200 on the S&P was a classic example of huge volumes lower than rather tepid buying on the bounce from 1,100.
Another trading clue will come "when you start to see bad news not getting sold," says Bleier. Remember last week when Hewlett-Packard (HPQ) announced they were ditching their PC division and the stock dropped about 25%? That's what bad news being sold looks like. When expectations are low enough for stocks to shake-off earnings warnings, it'll be a sign to Bleier that we've gotten to a level where stocks can be traded.
There aren't many recent examples of a stock shaking off bad news, which suggests stocks still have a negative bias. In such environments "it's preservation of capital, not what you can make on your capital." Bleier doesn't pretend to know how a market plunge will impact GDP or consumer confidence but he has a technical level in mind. To him it's about a retracement. The S&P500 low of March 2009 was 666. We need "half these gains given back, then hold" for Bleier to call the full-fledged low.
So, roughly 1,000 on the S&P, a withdrawal of "angel dust" from the Fed, and antipathy towards stocks; then we'll have a lasting bottom in equities in Bleier's view. So, no, we aren't there yet. But we're getting close.
