MarketWatch featured an article titled “Five signs the stock market has bottomed.” Here are some highlights:
Are we there yet? That’s what investors want to know as they search for a bottom after six punishing months for stocks. People are understandably eager to be done with this downturn and see markets move forward.
It’s a tough wish at a time when the U.S. economy is clearly contracting and likely in recession. The good news is that stocks typically recover several months ahead of the economy. The bad news is that we’re probably closer to the beginning of this slump than the end.
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Remember that the stock market will show signs of bottoming well before every bit of bad economic news is wrung from the headlines. These milestones won’t be obvious or appear at once, and keep in mind that just because stocks stop going down doesn’t mean prices will roar to new records. The damage to the economy is done, and will take time to repair.
The story goes on to acquaint the reader with five key leading indicators to watch for so that you will be the first to know when that elusive bottom actually occurs.
There are faulty assumptions with some of the reasoning in this article.
First, despite Wall Street employing more fortune tellers than any other industry, no one can with any amount of certainty forecast or determine a market bottom. Many have tried and failed, and those who succeeded had a temporary stroke of luck, which went out the window with the next forecast.
Second, the assumption is that everybody is looking to buy at the very bottom. Since that point can’t be determined as it is happening, this will be at best a 50/50 chance of the market rebounding or further sinking into oblivion.
Third, my experience tells me that a bottom can only be determined after it has occurred. In other words, we need to see a sustained rally off a bottom formation and only then can we reasonably assume that the trend has reversed from down to up. The opposite occurs at top formations.
Fourth, trying to determine ahead of time whether a bottom has been formed is an exercise in futility and a wild guess at best. For your long-term investment success, it is not necessary to try to engage in risky bottom fishing. Following trends and investing in mutual funds/ETFs as they break out above their long-term trend lines will not only keep you on the right side of the market, but also let you live a much more worry-free investment life.
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