We're Not Out of the Woods Yet

Is this the bottom for this market cycle? A lot of people are cheerleading for the market right now, saying that the bottom is in place and that the Bear Stearns (BSC - commentary - Cramer's Take) buyout is the cataclysmic event that tells us the worst is over.

The market is up over 100 S&P points, with almost all of the gains coming in just the last week. There seems to be powerful buying in the market, and it seems easy to say, "This is it, everybody in the pool."

I would love to jump in here, and I confess I am tempted. But there is little voice in my head that is yelling at me to realize that this would be the most forecasted and widely recognized market bottom in the history of the stock market. I am also somewhat skeptical that what the worst financial crisis since either the early 1990s or the 1930s, depending on who you talk to, is over in less than nine months, with a peak-to-trough decline of just about 25%. I seem to recall that the collapse of the Internet boom resulted in a drawdown of better than 50%, even as the Fed lowered rates and GDP growth was positive.

I also recall that after the initial market break in 2000, the market rallied to new highs in both 2001 and 2001 before collapsing to new lows. In 2002, the Dow rallied about 30% before collapsing back to the low. The lows came when everyone was scared to death and pulling money out of the market.

I was a broker at the time, and it was easier to sell communicable disease at that time than it was to convince someone to put money to work in the stock market. The phrase of the day was not "buying the dips"; it was "only dips are buying." No one anywhere wanted anything to do with the stock market. Money flowed back to the banks for the fist time in over 10 years as investors sought security and safety over equity returns.

---

At the time of publication, Melvin had no positions in stocks mentioned, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.