Wednesday, December 3, 2008

Random Thoughts on a Bottom

I have been getting quite a few questions via email and while I cannot answer every one of them many overlap. I also think it advisable to answer some publicly via the blog so all might benefit or ridicule my responses.

Reader D.M. writes....

I know this may sound stupid but when will we know its a bottom? What should I be looking for?

This is a serious question that many non-professionals constantly have in the back of their mind. I believe this is fostered by the the financial media in turn by their advertisers as they constantly debate daily whether or not the market has reached a bottom. Kind or ironic they never had this type of debate or discussion a year ago as the market made it's top but I digress.
They want, no check that, they need YOU to stay and play the game!

The absolute last thing the likes of CNBC, Fidelity, Nuveen, Schwab et al want is for you to pack up our bat and ball and head home. They will do all in their power to keep you interest piqued. Hence million dollar stock picking contests, tight dresses, etc.. you getting the picture now?

That said, I believe that in looking for a bottom to be formed we must first consider that we are looking for this in the aftermath of the mother of all credit/leverage and debt bubbles civilization has ever seen. This leads this simpleton to suspect that the pendulum will swing, just of its own momentum, not just to the mean, but much further to the downside. That said. here are some of the things I am looking for on the DISTANT horizon as possible clues.

  1. You ask people at parties, that is if you still get invited and if people are still having them, if they own stocks and they respond with a resounding NO ! Not just a few people but the overwhelming majority of people you talk to have abject disdain for stocks.
  2. Brokerage firms will start discontinuing coverage on various stocks/sectors of the market.
  3. All day financial media, re: CNBC, Bloomberg, Fox Business will cease operations or curtail them significantly.
  4. The longtime pollyannas like Larry Kudlow, Vince Farrell, will slowly and reluctantly throw in the towel and give up on stocks.
  5. The acknowledged gurus of the day will be thoroughly and utterly discredited. By this I mean gurus of all types, momentum, value, Garp, etc. who are predominantly long only investors. No one will be immune. Bill Miller, Warren Buffett, Marty Whitman, all of them for the bear is like the terminator it has no feelings, it knows no remorse and will not stop till it accomplishes it's goal.
  6. This leads into the next step of this process which is a very important one. The initial genius' who called the top got short and prospered grandly in the initial decline will get back into the market thinking the bottom is in, that stocks are screaming values and besides they can't all go to zero, only to get wiped out. I fear that this mother of all bear markets, remember this a logical to assume given the mother of all bubbles has burst, will do ALL in it's power to take everything from everyone.

Know this, all the above is conjecture as we first and foremost MUST respect the tale of the tape. So no matter how much bulls may want the tape to go up or bears to want it to go down we must let the tape tells us. In this regard, and all the hype, conjecture, volatility and noise I think it best to focus on the monthly and for me in particular weekly charts

Good speculating to you all and never forget that "an investor is a speculator who made a mistake and will not admit it".

Open Positions:
Short 1 unit Apple ticker AAPL @ $110.90 stop @ $100.53
Short 1 unit ticker CRM @ $56.05 stop @ $32.56

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