October 27, 2008

A Bottom Man

I love bottoms. I just wish I could take advantage of every bottom I see. I can't but I still look. Contrary to what all the experts are saying, bottoms come in many shapes and sizes: some are skinny and fast moving, other are large and lumbering and others bounce along. I've posted some pictures to show you.

The top chart shows the Dow from the mid-60's to the mid-80's, a period of time where the market went nowhere. It was the end of a twenty year bull market followed by major macro-economics hits to the market: inflation from too much spending (large growing deficits) by government on war and new social programs, the oil crisis and stagnating growth. The market bounced along (granted there were big bounces which offered an opportunity to make money for the nimble) for almost twenty years.

The second chart shows the Dow for the 1987 market crash. A crash caused by a crisis in confidence after the Hong Kong market crashed. The Fed quickly pumped money into the economy allowing for a quick recovery (Greenspan emerged as a genius) - a somewhat rare V-shaped recovery.

The bottom chart shows the 2002 bottom of the S&P. This decline began in 2000 with the internet bubble burst and the economy was further damaged after 9/11. It was a drawn out, painful decline. It took about eight months for the bottom to form - the market bouncing around in a tight range.

If I had to guess, which I am doing, I'd say we are in store for a 60's type recovery (see the Dow chart from this previous post.) The good news, if you want to call it that, is that we are almost 10 years into the process. The market levels we reached starting 10/10 and have played around since then, were the levels where I thought we would have major support. However, I do believe we have a good chance of revisiting the 2002 lows, reach on 10/10/2002 (I hope I'm wrong.)

Here's a good article from the WSJ about bear market bottoms.