When Will It Turnaround?

Now that the S&P 500 hit another new low today, investors are curious when things will finally turnaround. Is every rally just a bear market rally? The market hit a major intra-day level low exactly tow weeks ago, and we’ve been hovering above it ever since.
I’m no technical analyst but it does seem that the market likes to test its recent lows, and if no new low is made, prices rally. Fortunately, we didn’t break through the intra-day low from October 10. What impresses me is that most of the rally since October 10 was in pretty bad stocks, while the higher quality stocks, like our Buy List, haven’t been doing too well. That just tells me that this two-week interlude was merely a reaction against the reaction.
Today is also the 79th anniversary of Black Thursday, and it’s the 101st anniversary of J.P. Morgan bailing out the economy during the Panic of 1907. The panic ended when J.P. said so — I wish he were around today. Still, spotting a bottom is tough business, and the rally often begins when things look terrible.
A perfect example is what happened 18 years ago. Note the chart below. The black line is the S&P 500 (left scale) and the gold line is earnings (right scale). The two axes are scaled at a ratio of 16 to 1.
image721.png
The market rallied while earnings continued to fall through 1990 and 1991. Due to the rising market, P/E ratios soared, but that would have been a false signal that stocks were overpriced. Earnings were still plenty lousy through 1992. It wasn’t until 1993 that earnings growth really got going. The yellow line finally caught up to the black line in 1994, but both kept on rising.
The point is that the market can turnaround anytime now. I grew used to clients saying that they’re just “waiting for the smoke to clear.” It doesn’t work that way. The market has already crashed. It can certainly go down further, but most of the risk is gone.

Posted by on October 24th, 2008 at 8:08 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.