Back To (Bear) Business

As I mentioned yesterday, once the election is over, reality will most likely set in—and it did.

Wall Street hates uncertainly and at long last the election outcome is now a cold hard fact. And so are the economic conditions we are in, which may justify sharp bear market rallies, but not necessarily a return to a bullish scenario.

In yesterday’s post, I referenced the impatience of many investors eager to determine a market bottom and ready to jump back in. Reader Doug had this to say:

History tells us that when bear markets end, something like 40% of the rally is in the first few months (can’t remember the exact number).

So, indeed, one should not be “amazed” at the eagerness of sidelined investors at this stage of the market’s performance.

Unfortunately, eager investors expect some “V” type of recovery, so that they can pick a bottom and ride the gravy train up into the stratosphere. Along those lines, they forget that a bottom may not necessarily be in place when they think it is as was clearly evident by the activity in October.

We are in a bear market which, according to my work, started on 6/23/08, when we went to all cash. Bear markets don’t end with a bang to the upside; they end with slow and inconsistent moves until prices eventually break out to higher levels. Sudden and violent upside moves are always suspect.

Who is to say that what we saw in October was the bottom? Some respected economists see another 20% to 40% downside potential, which presents a serious problem for those who eagerly engage in the fine art of bottom fishing. Why? Because most will simply not believe that lower prices are possible and therefore will not work with a sell stop discipline. Once that bear continues, the cost of ignorance will have caused further portfolio damage.

In my view, you are far better off letting this bear run its course to exhaustion before making any purchase decisions. The idea is to jump aboard once a long-term trend can be identified, even if it means entering at a higher price.

Besides the technical aspects, take a look at the daily news menu. Does it look like we have turned the corner economically, have strong job creation along with all the other items that let us look forward to an environment of higher stock prices in the next few months?

If you can identify some of these things, please share them with me, because I sure can’t see any fundamental or technical reasons confirming that we’ve seen a market bottom already.