A Test of the Low Is the Only Way to Know

Thursday's market action was horrible, just horrible. The pundits were all trying to ascribe reasons for it all day long. The fact as I see it is the news headlines were neutral to slightly positive during the day, and the market sold off because we are in a bear market, and we have to find out if the July lows are indeed the lows for this bear. The only way to do that is to sell off any rally and test the low.

The July low showed a decline of just under 25% from the high, and that would be a good bit better than the average post-World War II decline of 30% plus. But if you take out the bear that followed the tech bubble collapse, then -25% would be in line with the resulting adjusted average. You can always find a way to slice the data to get to your conclusion, and there is no reason to take out the worst market time.

Actually, the 1973-74 bear market was as bad as the tech collapse, but how many exceptions can I get away with? The current housing collapse and accompanying credit crunch may require an even worse market reaction than usual for all I know.

But this market isn't nearly as richly valued as that tech market in 2000, so there could be less of a correction needed to get any excess out of stock prices. Oil is finally in its correction, and the dollar is reasserting itself, which are both good for stocks.

But the fear is not knowing where the bottom is for the housing market, and credit spreads remain punishingly wide. The failure of one commodity-focused hedge fund the other day has people wondering if there are more to follow.

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Vincent Farrell Jr. is chief investment officer for Soleil Securities Group and a regular guest on CNBC and other national print and broadcast media.

Prior to joining Soleil in August 2008, Farrell was a principal of Scotsman Capital Management. Before that, he was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships.

Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.

Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.