There has been so much talk lately about "The Bottom," what it will look like, when it will come, how we will know, that I thought it was time to weigh in.
First things first: There is no way to predict a bottom. None. Period. Anyone who called any bottom was one thing: Lucky. As evidence, I give you the famous "bottom" of April 2000. How many folks were screaming -- sometimes at me, because I wasn't convinced -- that you had to BUY!!! A lot. And they were wrong.
How about the famous
Fed Cut "bottom" of January 2001? "Don't fight the Fed!" "The Fed has put in a concrete floor for us!" Silliness, as we now know.
OK, let's dispense with the crystal ball stuff. As for what it will look like, my guess is the majority of folks are waiting for the "ultimate capitulation." The mega-down day where everything is puked up, and the savvy investor who buys where there's blood in the streets, swoops in and picks up all the bargains.
Well, if you're looking for that kind of blowoff, the rest of this column and the charts below are for you. Hopefully, upon quick perusal, you'll notice two things. One, there are indeed blowoff days. But these days are rarely permanent bottoms. Sometimes they're temporary bottoms, but as you can see, you're rarely worse off waiting a few weeks or even months to get back into the market.
No, I am convinced that most bottoms are formed due to one thing: Sellers simply go away. Of course, in the strictest sense, sellers never really go away. Instead, let's just say they are less and less aggressive in wanting to get out at any price. So, what you really have is a state of equilibrium where buyers want to buy as much as sellers want to sell. (This is a handy way of explaining to people who argue there are always an equal number of buyers and sellers. That is true, but if sellers are more hysterical at getting out of the market, then buyers don't need to pounce on high prices to buy. Instead they can sit and wait because they know that another seller will come along and offer an even lower price to get rid of his or her position.)
The charts speak for themselves. Have a look and rethink whether buying that "capitulation day" is really worth the effort.
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Conclusions? Only one. There may or may not be a big blowoff day for our current bear market. But who cares? If history is any guide, there will be weeks and months after any blowoff where a true bottom is put in because sellers finally become exhausted. In other words, be patient. The "V" bottom isn't worth chasing because the highest reward-to-risk time to buy is not during hysteria. Instead it's when the market has all the excitement of a
Duke-
Monmouth first round
NCAA tournament game. In other words, buy when folks are sleeping -- not when they're bleeding.
Gary B. Smith
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